Economics Lecture Notes: Supply and Demand

Introduction

• Purpose: Bridge the gap between understanding and applying supply and demand in economics.
• Objective: Save time for economics students by quickly explaining supply and demand concepts.

Key Concepts of Demand

• Demand Curve: Illustrates the inverse relationship between price and quantity demanded.
  • Price Increase: Quantity demanded decreases.
  • Price Decrease: Quantity demanded increases.

Reasons for the Law of Demand

1. Substitution Effect
   • Price increase leads consumers to substitute away to other products.
   • Example: Higher ice cream prices lead to more candy bar purchases.
2. Income Effect
   • Price increase reduces purchasing power, decreasing quantity demanded.
   • Lower prices increase purchasing power, increasing quantity demanded.
3. Law of Diminishing Marginal Utility
   • Additional consumption yields less satisfaction, requiring price drops to increase demand.

Shifters of Demand

1. Taste and Preferences
   • Example: Hot weather increases demand for ice cream.
2. Number of Consumers
   • More consumers increase demand; fewer decrease demand.
3. Price of Substitutes and Complements
   • Substitutes: Higher prices of substitutes increase demand.
   • Complements: Higher prices of complements decrease demand.
4. Income
   • Normal Goods: Income increase raises demand.
   • Inferior Goods: Income increase decreases demand.
5. Expectations
   • Future price expectations can increase current demand.

Key Concepts of Supply

• Supply Curve: Shows the positive relationship between price and quantity supplied.
  • Price Increase: Encourages more production (greater profits).
  • Price Decrease: Reduces production incentive.

Shifters of Supply

1. Price of Resources
   • Higher input prices decrease supply.
2. Technology
   • Technological advancements increase supply.
3. Government Actions
   • Taxes decrease supply; subsidies increase supply.
4. Number of Sellers
   • More sellers increase supply.
5. Expectations
   • Future price changes can alter current supply.

Equilibrium

• Market Clearing Price: Where quantity demanded equals quantity supplied.
• Disequilibrium: Results from price changes leading to shortages or surpluses.
  • Shortage: Quantity demanded > quantity supplied at low prices.
  • Surplus: Quantity supplied > quantity demanded at high prices.
• Free Market: Prices naturally adjust to return to equilibrium unless government intervention occurs.

Application of Supply and Demand

• Shifts in Demand and Supply
  • Example: Study claiming ice cream increases intelligence shifts demand right.
  • Technological advancement shifts supply right, reducing prices.

Additional Concepts (Not Covered)

• Price Controls: Government-imposed price ceilings and floors.
• Double Shifts: Simultaneous changes in both demand and supply.
• Macroeconomics: Application of supply and demand to the entire economy.
• Microeconomics: Examines elasticity and the shape of supply and demand curves.

Conclusion

• Practice different scenarios of demand and supply shifts.
• Resources available for further study and practice.
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