Microeconomics: Demand and Supply – Chapter 3 Study Notes

Markets and Prices

Introduction to Markets

Markets are fundamental to microeconomics, serving as the mechanism through which buyers and sellers interact to exchange goods and services. Understanding market structures and price determination is essential for analyzing economic behavior.

• Market: Any arrangement that enables buyers and sellers to get information and do business with each other.

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

• Money Price: The amount of money needed to buy a good.

• Relative Price: The ratio of the money price of one good to the money price of the next best alternative; this is the opportunity cost.

Example: If an energy bar costs $2 and a granola bar costs $1, the relative price of the energy bar is 2 granola bars per energy bar.

Demand

Definition and Key Concepts

Demand represents consumers' willingness and ability to purchase goods and services at various prices during a specific time period.

• Demand: The entire relationship between the price of a good and the quantity demanded.

• Quantity Demanded: The amount consumers plan to buy at a particular price and time.

• Wants: Unlimited desires for goods and services; demand reflects choices about which wants to satisfy.

Law of Demand

The law of demand describes the inverse relationship between price and quantity demanded, holding other factors constant.

• Law of Demand: Other things remaining the same, the higher the price of a good, the smaller the quantity demanded; the lower the price, the larger the quantity demanded.

• Reasons for Law of Demand:

  • Substitution Effect: As the price of a good rises, consumers switch to substitutes, decreasing quantity demanded.

  • Income Effect: As the price rises relative to income, consumers can afford less, decreasing quantity demanded.

Demand Curve and Demand Schedule

The demand curve graphically represents the relationship between price and quantity demanded, assuming other factors remain unchanged.

• Demand Curve: Shows quantity demanded at each price.

• Demand Schedule: A table listing quantities demanded at different prices.

Price (dollars per bar)	Quantity demanded (millions of bars per week)
0.50	22
1.00	15
1.50	10
2.00	7
2.50	5

Equation: The demand curve can be expressed as $Q_d = a - bP$, where $Q_d$ is quantity demanded, $P$ is price, and $a$, $b$ are parameters.

Movements Along vs. Shifts of the Demand Curve

• Movement Along: Caused by a change in the price of the good itself.

• Shift: Caused by changes in other factors (income, preferences, prices of related goods, etc.).

Factors That Change Demand

• Prices of Related Goods:

  • Substitute: A good that can replace another. If the price of a substitute rises, demand for the original good increases.

  • Complement: A good used together with another. If the price of a complement rises, demand for the original good decreases.

• Expected Future Prices: If prices are expected to rise, current demand increases.

• Income:

  • Normal Good: Demand increases as income increases.

  • Inferior Good: Demand decreases as income increases.

• Expected Future Income and Credit: If future income or credit availability is expected to rise, current demand may increase.

• Population: Larger population increases demand.

• Preferences: Changes in tastes or preferences affect demand.

Supply

Definition and Key Concepts

Supply represents producers' willingness and ability to sell goods and services at various prices during a specific time period.

• Supply: The entire relationship between the price of a good and the quantity supplied.

• Quantity Supplied: The amount producers plan to sell at a particular price and time.

Law of Supply

The law of supply describes the direct relationship between price and quantity supplied, holding other factors constant.

• Law of Supply: Other things remaining the same, the higher the price of a good, the greater the quantity supplied; the lower the price, the smaller the quantity supplied.

• Marginal Cost: The cost of producing one more unit increases as quantity produced increases. Producers supply only if price covers marginal cost.

Supply Curve and Supply Schedule

• Supply Curve: Shows quantity supplied at each price.

• Supply Schedule: A table listing quantities supplied at different prices.

Equation: The supply curve can be expressed as $Q_s = c + dP$, where $Q_s$ is quantity supplied, $P$ is price, and $c$, $d$ are parameters.

Movements Along vs. Shifts of the Supply Curve

• Movement Along: Caused by a change in the price of the good itself.

• Shift: Caused by changes in other factors (input prices, technology, etc.).

Factors That Change Supply

• Prices of Factors of Production: Higher input prices decrease supply (shift left).

• Prices of Related Goods Produced:

  • Substitute in Production: If the price of a substitute falls, supply of the original good increases.

  • Complement in Production: If the price of a complement rises, supply of the original good increases.

• Expected Future Prices: If prices are expected to rise, current supply decreases.

• Number of Suppliers: More suppliers increase supply (shift right).

• Technology: Advances lower production costs and increase supply.

• State of Nature: Natural events (weather, disasters) can affect supply.

Market Equilibrium

Equilibrium Price and Quantity

Market equilibrium occurs when quantity demanded equals quantity supplied at a particular price. This price is called the equilibrium price, and the corresponding quantity is the equilibrium quantity.

• Equilibrium: A situation in which opposing forces balance each other.

• Equilibrium Price ($P^*$): The price at which $Q_d = Q_s$.

• Equilibrium Quantity ($Q^*$): The quantity bought and sold at the equilibrium price.

Equation: Set $Q_d = Q_s$ and solve for $P^*$ and $Q^*$.

Price as a Regulator

• Surplus: If price is above equilibrium, quantity supplied exceeds quantity demanded; price falls.

• Shortage: If price is below equilibrium, quantity demanded exceeds quantity supplied; price rises.

• Adjustment: Price moves toward equilibrium where plans of buyers and sellers match.

Predicting Changes in Price and Quantity

Effects of Changes in Demand and Supply

Shifts in demand or supply curves lead to changes in equilibrium price and quantity. The direction and magnitude depend on which curve shifts and by how much.

• Increase in Demand: Demand curve shifts right; price and quantity increase.

• Decrease in Demand: Demand curve shifts left; price and quantity decrease.

• Increase in Supply: Supply curve shifts right; price decreases, quantity increases.

• Decrease in Supply: Supply curve shifts left; price increases, quantity decreases.

Simultaneous Changes in Demand and Supply

Change	Equilibrium Price	Equilibrium Quantity
Increase in Demand & Increase in Supply	Uncertain	Increases
Decrease in Demand & Decrease in Supply	Uncertain	Decreases
Increase in Demand & Decrease in Supply	Increases	Uncertain
Decrease in Demand & Increase in Supply	Decreases	Uncertain

Example: If both demand and supply increase, equilibrium quantity rises, but the effect on price depends on the relative magnitude of the shifts.

Additional info: These notes are based on Chapter 3 of "Microeconomics: Canada in the Global Environment" (12th Edition), focusing on the foundational concepts of demand, supply, and market equilibrium. All equations are presented in standard LaTeX format for clarity.