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

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Demand, Supply, and Equilibrium

Key Concepts and Learning Objectives

This chapter introduces the foundational principles of how markets operate, focusing on the behavior of buyers and sellers, the determination of market prices, and the effects of government intervention. The main objectives are to understand:

  • What constitutes a market

  • How buyers and sellers behave

  • How supply and demand interact to determine equilibrium

  • The impact of government price controls

Markets

Definition and Structure

Market - A group of economic agents who are trading a good or service plus the rules and arrangements for trading

  • 一群正在交換商品或服務的經濟行為者（像是買家和賣家), 再加上他們用來進行交易的規則和制度

  • Market may have a physical location or not

Market Price - the price at which buyers and sellers conduct transactions

  • 指的是買家和賣家實際進行交易時的成交價格 市場價格是商品最終「賣出去的價錢」

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

    • A lot of buyers

    • A lot of sellers

    • Each market participant has no influence on price

  • Certis Paribus - A Latin phrase meaning other things equal

    • income

    • resources

    • nature

In perfectly competitive markets, prices act as a selection device, encouraging trade between sellers with low production costs and buyers who value the goods highly.

  • Competitive equilibrium price equates the quantity demanded and the quantity supplied. 

    • 在一個完全競爭的市場裡，商品的價格（price）會自然調整，直到買家想買的數量（需求量, quantity demanded)＝ 賣家想賣的數量（供給量, quantity supplied）

當奶茶一杯 $8 時， 　買的人太少（需求 ↓）、賣的人太多（供給 ↑）→ 會有剩餘 (surplus)

當奶茶一杯 $4 時， 　買的人太多（需求 ↑）、賣的人太少（供給 ↓）→ 會有短缺 (Shortage)

當價格剛好在 $6 時， 　買的人和賣的人數量相等 →  這就是 競爭均衡（Competitive Equilibrium）

What is a perfectly competitive market?

A perfectly competitive market has these characteristics:

  1. Many buyers and many sellers

  2. No one has power to change the price

  3. Everyone sells identical (same) products

  4. Firms are price takers (they must accept the market price)

How Do Buyers Behave?

Demand Concepts

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

    • Demand refers to the entire relationship between price and quantity demanded,

    • quantity demanded refers to a specific point on the demand curve.

    For example: I want to buy 7 corns, and one corns = 5 dollars, 7 = quantity demanded, and demand is a curve that shows the price and quantity.

    • Change in price -> change in quantity demanded

      • A change in the price of good does not shift the demand curve, we move along the demand curve

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

    • Demand schedule lists pairs of prices and quantitiy demanded

  • Demand Curve: A graph plotting quantity demanded against price.

Exhibit: Chloe's Demand Schedule and Demand Curve for Gasoline

Price ($/gallon)

Quantity Demanded (gallons/year)

5

50

4

100

3

150

2

200

1

250

The demand curve slopes downward, illustrating the Law of Demand: as price falls, quantity demanded rises (ceteris paribus).

Law of Demand

Price ↑ Qauntity of demand ↓

Price ↓ Qauntity of demand↑

What explains the Law of Demand

  • Subsitution Effect

    • Price ↑ = buy other things

  • Income effect

    • Price ↑ = afford less

Shifting in Demand

shifting right = demand "good things" happens, so increases

shifiting left = demand "bad things" happens, so decreases

Subsitute goods

  • Two goods are considered to be sutitude goods if:

    • The increase in the price of Good X causes the demand of Good Y increases too

      • When two variables get larger (or smaller) together, the relationship is directly proportional

      • For example: the price of coke and pepsi

        • if the price of coke increases, the pepsi demand is going to increase

        • since there is no differences and price of coke increases, so they switch to pepsi

Market Demand Curve

The market demand curve is the sum of all individual demand curves, showing the relationship between total quantity demanded and market price.

Exhibit: Aggregation of Demand Schedules

Price ($/gallon)

Sue's Qd

Carlos's Qd

Total Qd

5

200

400

600

4

300

600

900

3

400

800

1200

2

500

1000

1500

Shifts vs. Movements Along the Demand Curve

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

Shift of the demand curve: Caused by changes in:

  • Tastes and preferences

  • Income and wealth (normal vs. inferior goods)

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

  • Number and scale of buyers

  • Buyers' expectations about the future

How Do Buyers Behave?

(direct proportional)

If the price of increases, the demand for the goods increases

  1. Changes in Tastes and Preferences

    • A change in what we personally like, enjoy, or value

  1. Changes in Income and Wealth

    • A change in income affects your ability to pay for goods and services  (Normal Goods vs Inferior Goods)

  1. Changes in Availability and Prices of Related Goods

    • Substitutes goods 

  1. Changes in the Number of Buyers

    • When the number of buyers increases, the demand curve shifts right. When the number of buyers decreases, the demand curve shifts left. 

  2. Changes in Buyer’s Beliefs about the Future (expectation)

    • Consumers’ beliefs about the future influence demand

 (inversely proportional)

  1. Income: inferior goods

    • consumer income ↑ demand for inferior goods ↓

  2. Complements

    • price of complements ↑ demand for complements ↓

How Do Sellers Behave?

  1. Quantity Supplied 

    • The amount of a good that sellers are willing to sell at a given price 

  1. Supply Schedule 

    • A table that reports the quantity supplied at different prices

  1. Supply Curve

    • Plots the quantity supplied at different prices 

  1. Market Supply Curve 

    • Plots the relationship between the total quantity supplied and the market price, holding all else equal 

  1. Law of Supply 

    • In almost all cases, the quantity supplied rises when the price rises (holding all else equal).

Supply Concepts

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

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

  • Supply Curve: A graph plotting quantity supplied against price.

Exhibit: Aggregation of Supply Schedules

Price ($/barrel)

Chevron's Qs

ExxonMobil's Qs

Total Qs

10

0.4

0.0

0.4

25

0.7

0.6

1.3

50

1.0

1.2

2.2

75

1.1

1.0

2.1

The supply curve slopes upward, illustrating the Law of Supply: as price rises, quantity supplied rises (ceteris paribus).

Shifts vs. Movements Along the Supply Curve

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

  • Shift of the supply curve: Caused by changes in:

    • Input prices

    • Technology

    • Number and scale of sellers

    • Sellers' expectations about the future

Law of Supply

Price of Goods↑ Qauntity of supplied ↑

Price of Goods↓ Qauntity of supplied↓

Shifting in Supply

shifting right = supply "good things" happens, so increases

shifiting left = supply "bad things" happens, so decreases

Supply and Demand in Equilibrium

The market is in equilibrium when Qd = Qs

  • Equilibrium price - the price that balances Qs and Qd = P*

  • Equilibrium quantity - the Qs and Qd at the equilibrium price = Q*

Competitive Equilibrium

Competitive equilibrium is the point where the market agrees on a price and quantity such that quantity supplied equals quantity demanded. This price is called the competitive equilibrium price, and the corresponding quantity is the competitive equilibrium quantity.

Exhibit: Demand and Supply Curves for Oil

At the intersection of the demand and supply curves, the market reaches equilibrium.

Excess Demand and Excess Supply

  • Excess demand (shortage): Occurs when quantity demanded exceeds quantity supplied at a given price.

  • Excess supply (surplus): Occurs when quantity supplied exceeds quantity demanded at a given price.

Curve Shifting in Competitive Equilibrium

Shifts in either the demand or supply curve (or both) will change the equilibrium price and quantity. For example:

  • A rightward shift in demand increases equilibrium price and quantity.

  • A rightward shift in supply decreases equilibrium price but increases equilibrium quantity.

  • If both curves shift, the effect on price and quantity depends on the magnitude and direction of each shift.

Government Intervention: Price Controls

Effects of Price Ceilings and Floors

When the government sets a price ceiling (maximum price) or price floor (minimum price), the market may fail to reach equilibrium:

  • Price ceiling (e.g., gasoline cap): Can lead to shortages (excess demand).

  • Price floor (e.g., minimum wage): Can lead to surpluses (excess supply).

  • Rent control: Artificially low rents can cause housing shortages.

These policies may have unintended consequences if the market is not perfectly competitive.

Key Formulas

Demand and Supply Functions

  • Linear Demand Function:

  • Linear Supply Function:

  • Equilibrium Condition:

Summary Table: Shifts vs. Movements

Curve

Movement Along

Shift

Demand

Change in own price

Change in tastes, income, related goods, number of buyers, expectations

Supply

Change in own price

Change in input prices, technology, number of sellers, expectations

Examples and Applications

  • Brown vs. White Eggs: Brown eggs may cost more due to higher production costs (supply side) or perceived health benefits (demand side).

  • Parking on Campus: A shortage may occur if demand exceeds supply at the current price (e.g., free or low-cost parking).

  • 1973-1974 Oil Crisis: Government price caps led to gasoline shortages.

Additional info: These notes expand on the original slides by providing definitions, examples, and equations for clarity and completeness.

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