Economics Notes Chapter 3 Supply and Demand

Supply and Demand: A model of competitive market

Competitive Market
- A market where there are many buyers and sellers of the
same good or service
- No one individuals actions makes a noticeable difference on
the price at which the good or service is sold (for many
markets)
- Behavior describe by the supply and demand model
o The demand curve
o The supply curve
o The set of factors that cause the demand curve to shift
and the set of factors that cause the supply curve to
shift
o The market equilibrium, which includes equilibrium price
and quantity
o The way the market equilibrium changes when the
supply or demand curve shifts
The Demand Curve
The higher the price the less people want to buy that good or
service
The lower the price the more they want to purchase that good
or service
To draw a demand curve:
o Demand schedule: a table showing how much of a good
or service consumers will want to buy at different prices
o Quantity demanded: the actual amount of a good or
service consumers are willing to buy at a specific price
o Demand curve is curved because demand is not
proportional to demand
Considering other things equal, this idea is the Law of
demand

Shifts of the Demand Curve

The shift of the demand curve is a change in the quantity
demanded at any given price, denoted by a new demand
curve
Movement along a demand curve is a change in the
quantity demanded of a good arising from a change in the
goods price

Understanding shifts of the Demand Curve

Increase in demand rightward shift of the demand curve
Decrease in demand leftward shift of the demand curve
Reasons:
o Changes in prices of related goods or services
 Substitutes: two goods are substitutes if a rise in
price of one of the goods an increase in the
demand for the other good
Complements: Two goods are complements if a
rise in the price of one good leads to a decrease in
the demand for the other good (goods that are
consumed together)
o Changes in income
More income more likely to purchase a good at
any given price (this good would be a normal
good)
Inferior goods: Demand decreases when income
rises (bur rides vs. taxi rides)
o Changes in tastes
Changes in beliefs or cultural sheets
o Changes in expectations
o Changes in the number of consumers
Population growth
Individual demand curve: this illustrates the
relationship between quantity demanded and
price for an individual consumer
Market demand curve = horizontal sum of
individual demand curves (basically add all the
consumers together)
The Supply Curve
As price rises, the quantity supplied rises
Quantity supplied: Actual amount of good or service people
are wiling to sell at some specific point
Supply schedule: Shows how much of a good or service
would be supplied at different prices
Supply curve: shows the relationship between quantity
supplied and price
o Slope upward
Shifts of the Supply Curve
Shift of the supply curve
o A change in the quantity supplied of a good or a service
at any given price
Movement along supply curve
o Changes in the quantity supplied of a good arising from
a change in price

Understanding Shifts of the Supply Curve

Increase in supply rightward shift of supply curve
Decrease in supply leftward shift of supply curve
Reasons:
o Changes in input prices
 Input: A good/service that is used to produce
another good or service
Increase in input price production of final good
harder for producers (leftward shift)
o Changes in the prices of related goods or services
Quantity of any good a producer is willing to
supply demands on the prices of the co-produced
goods = substitutes in production (supply of one
rises, other falls)
Complements in production = two goods that are
produced together
o Changes in technology
Improvements in tech producers spending less
on input
o Changes in expectations
o Changes in the number of producers
Individual supply curve: relationship between
quantity supplied and price for individual producer
Market supply curve= horizontal sum of
individual supply curves

Supply, Demand and Equilibrium

A competitive market is at equilibrium when the quantity of a
good demanded = the quantity of the good supplied
Equilibrium price: the price that matches the quantity
supplied and the quantity demanded
Equilibrium quantity: the quantity supplied and demanded
at that time
Market-clearing price: a price that clears the market by
making everyone happy
Finding the Equilibrium Price and Quantity
Put the supply + demand curve on the same diagram and find
intersection

Why Do All Sales and Purchases in a Market Take Place at the Same
Price?
In an established market, all sellers receive and all buyers pay
approximately the same price market price
A Seller wont sell for less than what he knew most buyers
were willing to pay, he would wait for a new customer
A buyer would not buy for more than what he knew others
were buying for, he would leave or the seller would reduce

Why Does the Market Price Fall if It Is Above the Equilibrium Price?
There would be surplus
o Quantity supplied is greater than quantity demanded
o Occurs when price is above equilibrium
 Sellers would lower price

Why Does the Market Price Rise if It is Below the Equilibrium Price?
There would be a shortage
o Quantity demanded greater than quantity supplied
o Occurs when price below equilibrium
Buyers would offer more than before eventually

Changes in Supply and Demand

What Happens When the Demand Curve Shifts

Increase in demand leads to a movement along the supply
curve to a higher equilibrium
Decrease in demand leads to a fall in both equilibrium price
and quantity

What Happens When the Supply Curve Shifts

Decrease in supply leads to a increase in equilibrium price and
decrease in equilibrium quantity

Increase in supply leads to a fall in equilibrium price and rise

in equilibrium quantity

Simultaneous Shifts of Supply and Demand Curves

When demand increases and supply decreases, the
equilibrium price rises but change in equilibrium content in
ambiguous
When demand decreases and supply increases, the
equilibrium price falls but the change in the equilibrium
quantity is ambiguous
When both demand and supply increase equilibrium
quantity rises but price is ambiguous
When both demand and supply decrease equilibrium
quantity falls but price is ambiguous.

Competitive Markets And Others

When a market is competitive, individuals can base decisions
on less complicated analysis than those used in a
noncompetitive market