Key Concepts of Supply and Demand

Introduction

• Purpose: Bridge gap between knowledge and application of supply and demand.
• Goal: Understand concepts, then apply.

Demand

• Demand Curve: Shows inverse relationship between price and quantity demanded.
  • Law of Demand:
    • Price increase -> Quantity demanded decreases.
    • Price decrease -> Quantity demanded increases.
• Reasons for Law of Demand:
  1. Substitution Effect:
     • Price increase leads consumers to substitute with other products.
     • Price decrease leads consumers to buy more of the product.
  2. Income Effect:
     • Price increase reduces purchasing power, decreasing quantity demanded.
     • Price decrease increases purchasing power, increasing quantity demanded.
  3. Law of Diminishing Marginal Utility:
     • Additional consumption yields less satisfaction, hence price must drop to increase demand.

Shifters of Demand

1. Taste and Preferences:
   • Influenced by external factors (e.g., weather).
2. Number of Consumers:
   • More consumers increase demand; fewer consumers decrease demand.
3. Price of Related Goods:
   • Substitutes: Price increase in substitutes leads to higher demand for the product.
   • Complements: Price increase in complements leads to lower demand for the product.
4. Income:
   • Normal Goods: Higher income increases demand.
   • Inferior Goods: Higher income decreases demand.
5. Expectations of Future Prices:
   • Expecting price increases leads to higher current demand.

Supply

• Supply Curve: Shows positive relationship between price and quantity supplied.
  • Higher prices incentivize more production due to potential profit.

Shifters of Supply

1. Price of Resources:
   • Price increase in inputs leads to lower supply.
2. Technology:
   • Improvements lead to increased supply.
3. Government Actions:
   • Taxes decrease supply; subsidies increase supply.
4. Number of Sellers:
   • More sellers increase supply.
5. Expectations of Future Prices:
   • Expecting price increases may decrease current supply as producers wait to sell later.

Equilibrium

• Market Clearing Price: Where quantity demanded equals quantity supplied.

• Disequilibrium:

  • Shortage: Demand exceeds supply at low prices.
  • Surplus: Supply exceeds demand at high prices.

• Adjustments in free market move prices back to equilibrium.

Changes in Equilibrium

• Factors affecting demand or supply will shift curves:
  • Demand Increase: Price and quantity increase.
  • Demand Decrease: Price and quantity decrease.
  • Supply Increase: Price decreases, quantity increases.
  • Supply Decrease: Price increases, quantity decreases.

Additional Concepts

• Price Controls: Government-imposed price ceilings and floors.
• Further applications in macroeconomics (aggregate demand/supply) and microeconomics (elasticity).

Practice and Further Learning

• Importance of practice with supply and demand scenarios.
• Additional resources: review packets and worksheets for deeper understanding.