Topic: Supply and Demand
Introduction to Supply and Demand:
Supply and demand are fundamental concepts in economics that determine the
prices and quantities of goods and services in a market.
Demand refers to the quantity of a good or service that consumers are
willing and able to buy at various prices.
Supply refers to the quantity of a good or service that producers are
willing and able to sell at various prices.
Law of Demand:
The law of demand states that, all else being equal, as the price of a good
or service increases, the quantity demanded decreases, and vice versa.
Demand curves are typically downward-sloping, illustrating the inverse
relationship between price and quantity demanded.
Determinants of Demand:
Factors affecting demand include:
Price of the good or service.
Income of consumers.
Prices of related goods (substitutes and complements).
Tastes and preferences of consumers.
Expectations about future prices and income.
Law of Supply:
The law of supply states that, all else being equal, as the price of a good
or service increases, the quantity supplied increases, and vice versa.
Supply curves are typically upward-sloping, illustrating the direct
relationship between price and quantity supplied.
Determinants of Supply:
Factors affecting supply include:
Price of the good or service.
Costs of production (e.g., labor, materials, technology).
Prices of inputs (e.g., raw materials, energy).
Number of producers.
Expectations about future prices and input costs.
Market Equilibrium:
Market equilibrium occurs when the quantity demanded equals the quantity
supplied, resulting in a stable market price.
At equilibrium, there is no tendency for prices to change because buyers
are satisfied at the current price, and sellers are willing to supply the quantity
demanded.
Changes in Equilibrium:
Changes in demand or supply shift the respective curves, leading to changes
in equilibrium price and quantity.
If demand increases or supply decreases, equilibrium price and quantity
increase. Conversely, if demand decreases or supply increases, equilibrium price
and quantity decrease.
Price Controls:
Price ceilings set a maximum price that sellers can charge, leading to
shortages if the ceiling is below the equilibrium price.
Price floors set a minimum price that sellers can receive, leading to
surpluses if the floor is above the equilibrium price.
