Supply and Demand: Foundations of Competitive Markets

Supply and Demand: Foundations of Competitive Markets

Introduction to Competitive Markets

Competitive markets are central to the study of macroeconomics, as they determine how resources are allocated and prices are set. This section introduces the basic concepts and models used to analyze market behavior.

• Competitive Market: A market with many buyers and sellers, none of whom can individually influence the price of the good or service.

• Supply and Demand Model: A framework for understanding how competitive markets operate, focusing on the interaction between buyers and sellers.

• Key Elements of the Model:

  1. The demand curve

  2. The supply curve

  3. Factors that shift the demand and supply curves

  4. The market equilibrium

  5. Changes in market equilibrium

Supply

Supply describes the behavior of sellers in the market. It is represented through schedules and curves that show how much of a good or service producers are willing to sell at different prices.

• Supply Schedule: A table showing the quantity of a good supplied at various prices.

• Supply Curve: A graphical representation of the supply schedule, typically upward sloping, indicating that higher prices lead to higher quantities supplied.

• Quantity Supplied: The amount producers are willing and able to sell at a specific price.

Example: Supply Schedule for Uber Rides

Price (per ride)	Quantity of Uber rides supplied
$14.00	1,160
$13.75	1,150
$13.50	1,120
$13.25	1,070
$13.00	1,000
$12.75	910
$12.50	800

Shifts of the Supply Curve

The supply curve can shift due to changes in factors other than the price of the good itself. A rightward shift indicates an increase in supply, while a leftward shift indicates a decrease.

• Input Prices: Higher input prices decrease supply; lower input prices increase supply.

• Prices of Related Goods: Changes in profitability of substitutes or complements in production can shift supply.

• Technology: Improvements in technology increase supply.

• Expectations: Anticipation of future price changes can affect current supply.

• Number of Producers: More producers increase supply; fewer decrease it.

Example: Shift in Supply Schedules for Uber Rides

Price (per ride)	Quantity supplied in 2019	Quantity supplied in 2020
$14.00	1,160	960
$13.75	1,150	950
$13.50	1,120	920
$13.25	1,070	870
$13.00	1,000	800
$12.75	910	710
$12.50	800	600

Movement Along vs. Shift of the Supply Curve

A movement along the supply curve is caused by a change in the price of the good itself, while a shift of the supply curve is caused by changes in other factors.

• Movement Along: Change in quantity supplied due to a change in price.

• Shift: Change in supply due to factors such as input prices, technology, or number of producers.

Graphical Representation

On a supply curve graph, a movement along the curve is shown as a change from one point to another on the same curve, while a shift is shown as the entire curve moving left or right.

Key Formulas

• Supply Function (general form):

$Q_s = f(P, P_{inputs}, P_{related}, Technology, Expectations, N_{producers})$

• Where $Q_s$ is quantity supplied, $P$ is price of the good, $P_{inputs}$ is price of inputs, $P_{related}$ is price of related goods, and $N_{producers}$ is number of producers.

Summary Table: Factors Affecting Supply

Factor	Effect on Supply
Input Prices	Increase → Supply decreases; Decrease → Supply increases
Related Goods	Higher profitability of substitutes → Supply decreases; Complements → Supply increases
Technology	Improvement → Supply increases
Expectations	Higher expected future price → Current supply decreases
Number of Producers	More producers → Supply increases; Fewer producers → Supply decreases

Additional info: These notes are based on textbook slides from Krugman & Wells, "Economics," 7th Edition, and are suitable for introductory macroeconomics students. The demand side, equilibrium, and further applications are covered in subsequent slides and chapters.