Microeconomics Study Notes: Demand, Supply, and Market Equilibrium

Chapter 3: Demand, Supply, and Equilibrium

Markets

Markets are fundamental to microeconomics, representing the interaction between buyers and sellers where goods and services are exchanged. Markets can be local, national, or international, and prices are discovered through these interactions.

• Definition: A market is any arrangement that allows buyers and sellers to exchange goods, services, or resources.

• Types of Markets: Local (e.g., farmers' market), national (e.g., stock market), international (e.g., oil market).

• Price Discovery: Prices are determined by the interactions of supply and demand.

Demand

Demand refers to the various quantities of a good or service that consumers are willing and able to purchase at different prices during a specific period. Demand can be represented as a schedule (table) or a demand curve (graph).

• Demand Schedule: A table showing quantities demanded at various prices.

• Demand Curve: A graph plotting price against quantity demanded, typically downward sloping.

• Individual vs. Market Demand: Individual demand refers to one consumer, while market demand aggregates all consumers.

Law of Demand

The law of demand states that, other things equal, as the price of a good falls, the quantity demanded rises, and as the price rises, the quantity demanded falls.

• Price as an Obstacle: Higher prices discourage buyers.

• Diminishing Marginal Utility: Each additional unit of a good provides less added satisfaction.

• Income Effect: Lower prices increase consumers' purchasing power.

• Substitution Effect: Lower prices make a good more attractive relative to substitutes.

The Demand Curve

The demand curve graphically represents the relationship between price and quantity demanded. It is typically downward sloping, reflecting the law of demand.

• Example: For gasoline, as price decreases from $5 to $1 per gallon, quantity demanded increases from 10 to 80 gallons per week.

Price per Gallon	Quantity Demanded (Qd)
$5	10
$4	20
$3	35
$2	55
$1	80

Market Demand

Market demand is the sum of all individual demands for a good or service at each price. It is found by adding the quantities demanded by all buyers at each price level.

Price per Gallon	Quantity Demanded Joe	Quantity Demanded Jen	Quantity Demanded Jay	Total Qd per week
$5	10	12	8	30
$4	20	23	17	60
$3	35	39	26	100
$2	55	60	39	154
$1	80	87	54	221

Changes in Demand

Changes in demand refer to shifts of the entire demand curve, caused by factors other than the price of the good itself. An increase in demand shifts the curve right; a decrease shifts it left.

• Example: If the number of buyers increases, the demand curve shifts right, increasing quantity demanded at every price.

Price per Gallon	Quantity Demanded (Qd)
$5	2,000
$4	4,000
$3	7,000
$2	11,000
$1	16,000

Determinants of Demand

Determinants of demand are factors that cause the demand curve to shift. These include:

• Consumer Tastes and Preferences: Changes in trends or preferences can increase or decrease demand.

• Number of Buyers: More buyers increase market demand.

• Income:

  • Normal Goods: Demand increases as income rises.

  • Inferior Goods: Demand decreases as income rises.

• Prices of Related Goods:

  • Substitute Goods: Increase in the price of one increases demand for the other.

  • Complementary Goods: Increase in the price of one decreases demand for the other.

• Consumer Expectations:

  • Expectations of future prices or income can affect current demand.

Formulas and Equations

• Demand Function (General Form):

$Q_d = f(P, T, N, I, P_r, E)$

• Where $Q_d$ = quantity demanded, $P$ = price, $T$ = tastes, $N$ = number of buyers, $I$ = income, $P_r$ = price of related goods, $E$ = expectations.

Additional info:

• These notes cover the first half of the chapter, focusing on demand. The next sections would address supply, equilibrium, and government-set prices.