Supply and Demand: Core Concepts in Microeconomics

Supply and Demand in Microeconomics

Quantity Supplied

The concept of quantity supplied refers to the amount of a commodity that producers are willing to offer for sale during a specific time period. It is important to note that this is not necessarily the quantity actually sold, but rather the amount firms are prepared to sell at a given price.

• Definition: The amount of a commodity that producers wish to sell in some time period.

• Key Point: Quantity supplied is what firms are willing to offer for sale, not the actual quantity sold.

Quantity Supplied and Price

There is a basic economic hypothesis (ceteris paribus) that the price of a product and the quantity supplied are positively related. This means that as the price of a product rises, the quantity supplied also increases, because production and sale become more profitable for producers.

• Producers' Motivation: Producers are interested in making profits; higher prices make production more attractive.

• Positive Slope: The supply curve typically slopes upward, indicating this positive relationship.

Supply Curve Shifts

When the supply curve shifts, it is due to changes in factors other than the price of the product itself. A shift to the left indicates a decrease in supply for any given price, while a shift to the right indicates an increase.

• Movement vs. Shift: Movement along the curve is caused by price changes; shifts are caused by other factors.

• Parallel Shifting: If the variable causing the change is not on the axis, the curve shifts.

Supply Schedule and Supply Curve

The supply schedule is a table showing the quantity supplied at different prices. The supply curve is a graphical representation of this relationship.

Price	Quantity Supplied
2	10
4	20
6	30
8	40

Example: As price increases from 2 to 8, quantity supplied increases from 10 to 40 units.

The Supply Function

The supply function mathematically describes the relationship between quantity supplied, price, and other factors that influence supply.

• General Form: $Q_s = f(P, ext{other factors})$

• Example: $Q_s = 9 + 0.5P$

Factors That Shift the Supply Curve

Several factors can cause the supply curve to shift, including:

• Prices of Inputs: Changes in the cost of production inputs.

• Technology: Improvements can increase supply.

• Government Taxes or Subsidies: Taxes decrease supply; subsidies increase it.

• Price of Other Products: If alternative products become more profitable, supply may decrease.

Types of Markets

Markets are places or systems where buyers and sellers interact to exchange goods and services. Examples include:

• Stock Exchange Market

• Flea Market

• Gig Economy Market

• Amazon Online Marketplace

Equilibrium Price

The equilibrium price is the price at which the quantity supplied equals the quantity demanded. At this point, the market is balanced, and there is no tendency for price to change.

• Definition: The price at which the total amount that suppliers want to sell equals the total amount that demanders want to buy.

• Key Point: At equilibrium, quantity demanded equals quantity supplied.

Disequilibrium

Disequilibrium occurs when there is either excess demand or excess supply in the market.

• Excess Demand: Buyers want to buy more than sellers want to sell (e.g., toilet paper during a pandemic).

• Excess Supply: Sellers want to sell more than buyers want to buy (e.g., sale and clearance events).

• Price Adjustment: Prices tend to adjust to eliminate disequilibrium.

Demand and Supply Schedules and Curves

Price	Quantity Demanded	Quantity Supplied
2	30	10
4	25	20
6	20	30
8	15	40

Example: At price 4, quantity demanded is 25 and quantity supplied is 20, indicating excess demand.

Demand and Supply Shocks

A demand or supply shock is any event other than price that changes demand or supply, causing the respective curve to shift.

• Demand Shock: Change in consumer preferences, income, etc.

• Supply Shock: Change in production costs, technology, etc.

• Example: COVID-19 pandemic caused global shocks to both demand and supply.

Laws of Demand and Supply Shocks

• Law 1: A positive demand shock causes an increase in both equilibrium price and equilibrium quantity (shift of the curve to the right).

• Law 2: A negative demand shock causes a decrease in both equilibrium price and quantity (shift to the left).

Calculating the Equilibrium

To find the equilibrium price and quantity, set the demand and supply functions equal to each other and solve for price.

• Demand Function: $Q_d = 12 - p$

• Supply Function: $Q_s = 9 + 0.5p$

• Equilibrium Condition: $Q_d = Q_s$

Example Calculation:

• Set $12 - p = 9 + 0.5p$

• Solve for $p$:

• $12 - 9 = 0.5p + p$

• $3 = 1.5p$

• $p = 2$

• Substitute $p$ back into either function to find $Q$:

• $Q = 12 - 2 = 10$

Equilibrium Price: 2

Equilibrium Quantity: 10

Graphical Representation of Shocks

Shifts in demand or supply curves are shown graphically as parallel movements of the curves. A rightward shift indicates an increase, while a leftward shift indicates a decrease.

• Demand Curve Shift: Increases equilibrium price and quantity.

• Supply Curve Shift: Can increase or decrease equilibrium price and quantity depending on direction.

Additional info: The notes include graphical illustrations and supply/demand schedules to reinforce the concepts of equilibrium, disequilibrium, and curve shifts.