Chapter 3: Demand and Supply – Microeconomics Study Notes

Demand and Supply in Market Economies

Introduction to Market Interaction

In a market-based economy, the interaction of demand and supply in markets determines the prices of goods and services, as well as the quantity produced and consumed. Changes in demand and/or supply lead to changes in both the price and the quantity exchanged in the market.

• Market: Any arrangement where buyers and sellers interact to determine price and quantity.

• Competitive Market: A market with many buyers and sellers, so no single participant can influence the price.

Markets and Prices

Money Price vs. Relative Price

Prices in economics can be expressed in two main ways: as money prices and as relative prices.

• Money Price: The amount of currency required to purchase a good or service.

• Relative Price: The ratio of the money price of one good to another; it represents the opportunity cost of choosing one good over another.

• Opportunity Cost: The value of the next best alternative forgone when making a choice.

Example: If turkey costs $5 per pound and steak costs $10 per pound, the relative price of turkey in terms of steak is$\frac{5}{10} = 0.5$ pounds of steak per pound of turkey.

The Law of Demand

Definition and Demand Curve

The Law of Demand states that, ceteris paribus (all else equal), there is an inverse relationship between the price of a good and the quantity demanded by buyers over a given period.

• Demand Curve: A graphical representation showing the quantity of a product consumers are willing to purchase at various prices.

• Maximum Willingness-to-Pay Curve: Shows the highest price a consumer is willing to pay for each quantity of a good or service.

• The coordinates of the demand curve also represent the marginal benefit received by the last buyer for each unit consumed.

Equation: A typical linear demand function can be written as $Q_d = a - bP$, where $Q_d$ is quantity demanded, $P$ is price, and $a$, $b$ are parameters.

Demand Schedule and Plotting

Discrete vs. Continuous Goods

A demand schedule lists quantities demanded at different prices. The way we plot the demand curve depends on whether the good is discrete or continuous.

• Discrete Goods: Only whole units can be purchased; demand curve is plotted as unconnected points.

• Continuous Goods: Fractions of units can be purchased; demand curve is plotted as a smooth, connected curve.

Example Table:

Price	Quantity Demanded (per month)
1	22
2	14
3	8
4	4
5	2

For large markets or continuous goods, connect the points to form a smooth curve. For small markets or discrete goods (less than 10 units), plot as dots only.

Types of Goods: Public vs. Private

Definitions and Characteristics

Goods can be classified based on how they are consumed and whether people can be excluded from their use.

• Private Good: Both rival (one person's use reduces availability for others) and excludable (possible to prevent others from using).

• Pure Public Good: Non-rival (one person's use does not reduce availability) and non-excludable (impossible or costly to prevent use).

Examples:

• Private Good: Sandwich

• Public Good: National defense

Type of Good	Rival?	Excludable?	Example
Private Good	Yes	Yes	Sandwich
Public Good	No	No	National Defense

Excludability: Ability to prevent someone from enjoying the benefits of a good. Rivalry: Whether one person's use diminishes the quantity available for others.

*Additional info: These notes are based on the provided slides and expanded with standard microeconomic definitions and examples for clarity and completeness.*