Overview
This lecture introduces the fundamental concepts of supply and demand, explains how they interact to determine prices and market equilibrium, and discusses real-world applications.
The Law of Demand
- Demand is the quantity of a good or service consumers are willing and able to buy at different prices.
- The law of demand states that as the price increases, the quantity demanded decreases, and vice versa.
- The demand curve slopes downward, showing an inverse relationship between price and quantity demanded.
The Law of Supply
- Supply is the quantity of a good or service producers are willing and able to sell at different prices.
- The law of supply states that as the price increases, the quantity supplied increases, and vice versa.
- The supply curve slopes upward, showing a direct relationship between price and quantity supplied.
Market Equilibrium
- Market equilibrium is the point where the supply and demand curves intersect.
- At equilibrium, the quantity demanded equals the quantity supplied.
- The equilibrium price is where goods are sold without surplus (excess supply) or shortage (excess demand).
- Surpluses occur when price is above equilibrium, leading to downward price pressure.
- Shortages occur when price is below equilibrium, leading to upward price pressure.
Shifts in Demand and Supply
- Shifts in demand occur when factors other than price change, moving the entire demand curve.
- Increased demand shifts the curve right (higher price and quantity); decreased demand shifts it left (lower price and quantity).
- Shifts in supply occur when factors other than price change, moving the entire supply curve.
- Increased supply shifts the curve right (lower price, higher quantity); decreased supply shifts it left (higher price, lower quantity).
Real-World Applications
- In housing markets, demand exceeding supply leads to higher prices and rents.
- In gasoline markets, decreased supply (e.g., due to disruptions) raises prices; increased supply lowers prices.
Key Terms & Definitions
- Demand — Quantity of a good consumers are willing and able to buy at various prices.
- Supply — Quantity of a good producers are willing and able to sell at various prices.
- Law of Demand — Higher prices lead to lower quantity demanded, and vice versa.
- Law of Supply — Higher prices lead to higher quantity supplied, and vice versa.
- Market Equilibrium — The price and quantity where demand equals supply.
- Surplus — Excess supply when price is above equilibrium.
- Shortage — Excess demand when price is below equilibrium.
Action Items / Next Steps
- Review demand and supply curves and practice drawing them.
- Reflect on examples of supply and demand in your daily life.