Chapter 4: Demand, Supply, and Equilibrium – Microeconomics Study Notes

Chapter 4: Demand, Supply, and Equilibrium

Learning Objectives

• Understand the concept of markets and their structure.

• Analyze buyer and seller behavior in competitive markets.

• Examine how supply and demand interact to determine equilibrium.

• Evaluate the effects of government intervention in market prices.

Markets

Definition and Structure

A market is a group of economic agents who are trading a good or service, along with the rules and arrangements for trading. Markets can be physical (such as a supermarket) or virtual (such as online platforms).

• Market Price: The price at which buyers and sellers conduct transactions.

• Perfectly Competitive Market: A market in which all sellers offer an identical good or service, and no individual buyer or seller can influence the market price.

Example: The price of brown eggs versus white eggs in a supermarket illustrates how market forces determine prices based on supply and demand.

Demand

Buyer Behavior

The demand curve plots the relationship between the market price and the quantity of a good demanded by buyers.

• Quantity Demanded: The amount of a good buyers are willing to purchase at a given price.

• Demand Schedule: A table reporting quantity demanded at different prices, holding all else equal.

• Law of Demand: In most cases, quantity demanded rises as price falls (ceteris paribus).

Market Demand

• The market demand curve is the sum of individual demand curves of all buyers.

• It shows the total quantity demanded at each market price.

Shifts vs. Movements Along the Demand Curve

• Movement along the curve: Caused only by a change in the product's own price.

• Shift of the curve: Caused by changes in:

  • Tastes and preferences

  • Income and wealth

  • Availability and prices of related goods (substitutes and complements)

  • Number and scale of buyers

  • Buyers’ expectations about the future

Types of Goods

• Normal Goods: Demand increases as income rises.

• Inferior Goods: Demand decreases as income rises.

Supply

Seller Behavior

The supply curve plots the relationship between the market price and the quantity of a good supplied by sellers.

• Quantity Supplied: The amount of a good sellers are willing to sell at a given price.

• Supply Schedule: A table reporting quantity supplied at different prices.

• Law of Supply: In most cases, quantity supplied rises as price rises (ceteris paribus).

Market Supply

• The market supply curve is the sum of individual supply curves of all sellers.

• It shows the total quantity supplied at each market price.

Shifts vs. Movements Along the Supply Curve

• Movement along the curve: Caused only by a change in the product's own price.

• Shift of the curve: Caused by changes in:

  • Input prices

  • Technology

  • Number and scale of sellers

  • Sellers’ expectations about the future

Equilibrium

Competitive Equilibrium

Competitive equilibrium is the point at which the market comes to an agreement about the price (competitive equilibrium price) and the quantity exchanged (competitive equilibrium quantity).

• At equilibrium, quantity demanded equals quantity supplied.

• Markets tend to converge to this price and quantity.

Excess Demand and Excess Supply

• Excess Demand (Shortage): Occurs when consumers want more than suppliers provide at a given price.

• Excess Supply (Surplus): Occurs when suppliers provide more than consumers want at a given price.

Shifts in Equilibrium

• A shift in the supply or demand curve will change the equilibrium price and quantity.

• Examples:

  • A leftward shift in supply (e.g., due to a major exporter ceasing production) increases price and decreases quantity.

  • A rightward shift in supply (e.g., due to technological breakthrough) decreases price and increases quantity.

  • A leftward shift in demand (e.g., due to environmental concerns) decreases both price and quantity.

  • Simultaneous shifts in supply and demand can have complex effects on equilibrium.

Government Intervention

Price Controls

When the government sets prices (such as during the U.S. oil crisis of 1973-1974), the market may fail to equate quantity demanded and quantity supplied, leading to shortages or surpluses.

• Price Ceiling: Maximum legal price; can cause shortages.

• Price Floor: Minimum legal price; can cause surpluses.

Taxes and Subsidies

• Governments can raise or lower domestic prices by taxing or subsidizing goods.

• Example: Gasoline prices vary across countries due to government policies, affecting quantity demanded.

Key Terms and Formulas

• Demand Function: $Q_d = f(P)$

• Supply Function: $Q_s = f(P)$

• Equilibrium Condition: $Q_d = Q_s$

Summary Table: Factors Shifting Demand and Supply

Factor	Shifts Demand?	Shifts Supply?
Price of the good itself	No (movement along curve)	No (movement along curve)
Income and wealth	Yes	No
Prices of related goods	Yes	No
Tastes and preferences	Yes	No
Number and scale of buyers/sellers	Yes (buyers)	Yes (sellers)
Expectations about the future	Yes	Yes
Input prices	No	Yes
Technology	No	Yes

Additional info: These notes expand on the brief points in the slides, providing definitions, examples, and academic context for each concept. The table summarizes the main factors that shift demand and supply curves, which is essential for understanding market dynamics.