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

Chapter 4: Demand, Supply, and Equilibrium

Learning Objectives

• Understand the nature and function of markets.

• Analyze buyer and seller behavior.

• Examine how supply and demand interact to determine equilibrium.

• Evaluate the effects of government intervention in markets.

Markets

Definition and Characteristics

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

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

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

Examples and Applications

• Supermarkets selling brown and white eggs at different prices.

• Gasoline markets with posted prices for unleaded fuel.

Demand

Buyer Behavior and the Demand Curve

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

• Market Demand Curve: The sum of individual demand curves, showing total quantity demanded at each 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 and the Supply Curve

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, holding all else equal.

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

Market Supply

• Market Supply Curve: The sum of individual supply curves, showing total quantity supplied at each 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

• Shifts in demand or supply curves change the equilibrium price and quantity.

• Example: If a major oil exporter ceases production, the supply curve shifts left, raising price and lowering quantity.

• Example: Technological breakthroughs shift supply right, lowering price and increasing quantity.

• Example: Environmental concerns shift demand left, lowering both price and quantity.

• Both curves can shift simultaneously, leading to complex changes in equilibrium.

Government Intervention

Price Controls

• When the government sets prices (e.g., price ceilings or floors), markets may fail to equate quantity demanded and supplied.

• Example: During the U.S. oil crisis of 1973-1974, the government set the price of gasoline, leading to shortages.

Key Formulas

• Demand Function: $Q_d = f(P)$

• Supply Function: $Q_s = f(P)$

• Equilibrium Condition: $Q_d = Q_s$

Example Table: Factors Causing Shifts in Demand and Supply

Factor	Demand Curve	Supply Curve
Price of the Good	Movement along curve	Movement along curve
Income/Wealth	Shift	No effect
Input Prices	No effect	Shift
Technology	No effect	Shift
Number of Buyers/Sellers	Shift	Shift
Expectations	Shift	Shift
Prices of Related Goods	Shift	No effect

Examples and Applications

• Why do brown eggs cost more than white eggs? (Supply-side factors such as production costs)

• Why does the price of roses increase before Valentine's Day? (Rightward shift in demand)

• Why doesn't the price of beer increase before Super Bowl Sunday? (Simultaneous shifts in supply and demand)

Summary

• Markets coordinate the actions of buyers and sellers through prices.

• Demand and supply curves illustrate how price and quantity are determined.

• Equilibrium occurs where quantity demanded equals quantity supplied.

• Shifts in demand or supply change equilibrium outcomes.

• Government intervention can disrupt market equilibrium, leading to shortages or surpluses.