1.
Supply and Demand Curves
A. Demand Curve
• Definition: A graphical representation showing the relationship between the price of a good and
the quantity demanded by consumers.
• Law of Demand: As the price of a good decreases, the quantity demanded increases, and vice
versa (ceteris paribus).
• Shape: Typically downward-sloping.
• Factors Affecting Demand:
o Income of consumers
o Consumer preferences
o Prices of related goods (substitutes and complements)
o Expectations of future prices
o Number of consumers in the market
B. Supply Curve
• Definition: A graphical representation showing the relationship between the price of a good and
the quantity supplied by producers.
• Law of Supply: As the price of a good increases, the quantity supplied increases, and vice versa
(ceteris paribus).
• Shape: Typically upward-sloping.
• Factors Affecting Supply:
o Production costs (e.g., wages, raw materials)
o Technology and production efficiency
o Prices of related goods (substitutes in production)
o Number of suppliers
o Expectations of future prices
2. Market Equilibrium
A. Definition
• Market equilibrium is the point where the quantity demanded equals the quantity supplied at a
particular price.
B. Equilibrium Price and Quantity
• Equilibrium Price: The price at which the quantity demanded equals the quantity supplied.
• Equilibrium Quantity: The quantity of goods bought and sold at the equilibrium price.
C. Graphical Representation
• The intersection of the demand and supply curves represents the market equilibrium.
• Surplus: Occurs when the price is above equilibrium, leading to excess supply (quantity supplied
> quantity demanded).
• Shortage: Occurs when the price is below equilibrium, leading to excess demand (quantity
demanded > quantity supplied).
D. Adjustments to Equilibrium
• If there is a surplus, prices tend to fall as suppliers lower prices to sell excess inventory.
• If there is a shortage, prices tend to rise as consumers compete for limited goods.
3. Shifts in Supply and Demand Curves
A. Demand Curve Shifts
• Rightward Shift: Indicates an increase in demand (e.g., due to increased consumer income or
preferences).
• Leftward Shift: Indicates a decrease in demand (e.g., due to a decrease in consumer income or
preferences).
B. Supply Curve Shifts
• Rightward Shift: Indicates an increase in supply (e.g., due to technological improvements).
• Leftward Shift: Indicates a decrease in supply (e.g., due to increased production costs).
4. Implications of Market Equilibrium
• Market equilibrium ensures resources are allocated efficiently.
• Changes in external factors (like government policy, natural disasters, etc.) can shift supply and
demand, resulting in new equilibrium prices and quantities.
