Microeconomics Study Guide: Markets, Demand, Supply, and Equilibrium

Markets and Competition

Definition of a Market

A market is a group of buyers and sellers of a particular good or service. Markets can be conventional (e.g., ice-cream, books) or less conventional (e.g., marriage, crime).

• Competitive market: a market with many buyers and many sellers, where no single buyer or seller can influence the price.

Types of Market Structures

• Perfect Competition: Many buyers and sellers, identical goods, and price takers.

• Monopoly: A market with only one seller (e.g., electricity provider).

• Oligopoly: A market with a few sellers (e.g., car manufacturers).

• Monopolistic Competition: A market with many sellers offering differentiated products (e.g., toothpaste manufacturers).

Price is determined by the interaction of buyers and sellers and allocates scarce resources.

Demand

The Demand Curve: Relationship Between Price and Quantity Demanded

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

• Quantity demanded: The amount of a good that buyers are willing and able to purchase.

• Law of demand: Other things equal (ceteris paribus), the quantity demanded of a good falls when the price of the good rises.

• Demand schedule: A table showing the price of a good and the quantity demanded at each price.

Price of Ice Cream Cone	Quantity of Cones Demanded
$0.00	12
$0.50	10
$1.00	8
$1.50	6
$2.00	4
$2.50	2
$3.00	0

Demand curve: Graphs price (vertical axis) against quantity demanded (horizontal axis). Movement along the curve represents a change in quantity demanded due to price change.

Market Demand

• Market demand: The sum of all individual demands for a good or service.

• Market demand curves are summed horizontally; quantities demanded are added for each price level.

Shifts in the Demand Curve

Factors other than price can shift the demand curve:

• Income:

  • Normal good: Increase in income leads to increase in demand.

  • Inferior good: Increase in income leads to decrease in demand.

• Prices of Related Goods:

  • Substitutes: Increase in the price of one good increases demand for another (e.g., pizza and hamburgers).

  • Complements: Increase in the price of one good decreases demand for another (e.g., ice cream and hot fudge).

• Tastes: Changes in consumer preferences (e.g., health recommendations).

• Expectations: Future income or prices can affect current demand.

• Number of Buyers: More buyers increase market demand.

Supply

The Supply Curve: Relationship Between Price and Quantity Supplied

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

• Quantity supplied: The amount of a good that sellers are willing and able to sell.

• Law of supply: Other things equal, the quantity supplied of a good rises when the price of the good rises.

• Supply schedule: A table showing the price of a good and the quantity supplied at each price.

Price of Ice Cream Cone	Quantity of Cones Supplied
$0.00	0
$0.50	0
$1.00	1
$1.50	2
$2.00	3
$2.50	4
$3.00	5

Supply curve: Graphs price (vertical axis) against quantity supplied (horizontal axis). Movement along the curve represents a change in quantity supplied due to price change.

Market Supply

• Market supply: The sum of all individual supply curves for a good or service.

• Individual supply curves are summed horizontally at every price.

Shifts in the Supply Curve

Factors other than price can shift the supply curve:

• Input Prices: Higher input prices decrease supply (higher cost).

• Technology: Improved technology increases supply (lower cost).

• Expectations: Higher expected future prices decrease current supply.

• Number of Sellers: More sellers increase market supply.

Demand and Supply Together

Equilibrium

Equilibrium is the point where the supply and demand curves intersect, determining the market price and quantity.

• Equilibrium price: The price that balances quantity supplied and quantity demanded.

• Equilibrium quantity: The quantity supplied and demanded at the equilibrium price.

Price of Ice Cream Cone	Quantity of Cones Demanded	Quantity of Cones Supplied
$0.00	19	0
$0.50	16	0
$1.00	13	1
$1.50	10	4
$2.00	7	7
$2.50	4	10
$3.00	1	13

• Surplus: If market price is above equilibrium, quantity supplied exceeds quantity demanded. Producers lower price to eliminate surplus.

• Shortage: If market price is below equilibrium, quantity demanded exceeds quantity supplied. Sellers raise price until equilibrium is reached.

• Law of supply and demand: Price adjusts to bring supply and demand into balance (equilibrium).

Analyzing Changes in Equilibrium

1. Identify the event that shifts supply or demand (or both).

2. Determine the direction of the shift.

3. Use the supply-and-demand diagram to see the changes in equilibrium price and quantity.

Shifts in Curves vs. Movements Along Curves

• Shift in the curve: Change in demand or supply due to factors other than price.

• Movement along the curve: Change in quantity demanded or supplied due to a change in price.

Example: A hurricane destroys part of the sugar-cane crop, driving up the price of sugar. An earthquake destroys ice cream factories, affecting supply in the ice cream market.

Comparative Table: Effects of Shifts in Demand and Supply

	No Change in Supply	Increase in Supply	Decrease in Supply
No Change in Demand	P same Q same	P down Q up	P up Q down
Increase in Demand	P up Q up	P ambiguous Q up	P up Q ambiguous
Decrease in Demand	P down Q down	P ambiguous Q down	P down Q ambiguous

Conclusion: Prices Allocate Resources

• Prices signal the allocation of scarce resources in the economy.

• Prices determine who produces each good and how much is produced.

Key Formulas and Equations

• Law of Demand: $Q_d = f(P)$, where $Q_d$ is quantity demanded and $P$ is price. As $P$ increases, $Q_d$ decreases.

• Law of Supply: $Q_s = f(P)$, where $Q_s$ is quantity supplied and $P$ is price. As $P$ increases, $Q_s$ increases.

• Equilibrium Condition: $Q_d = Q_s$ at equilibrium price $P^*$.

Example: If the price of ice cream is $2.00, both quantity demanded and supplied are 7 cones, indicating equilibrium.

Additional info: Academic context and definitions have been expanded for clarity and completeness. Tables have been recreated and summarized for study purposes.