DEMAND, SUPPLY, AND MARKET EQUILIBRIUM
Microeconomics - focus on problems of individual buyers and sellers
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Basic activities of microeconomics:
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Buying
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Selling
A market is simplified into two axes:
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Price - vertical/Y axis
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Quantity/Demand - horizontal/X axis
Demand Curve - represents the relationship between price of goods and quantity demanded in the
market. Shows demand based on different prices when all other factors remain the same.
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Law of Demand - as the price of goods decreases, the quantity demanded increases and vice versa
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A demand curve that follows the law is “downward sloping”
What shifts demand? Changes in…
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Income
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Taste
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Expectations
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Market size
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Price of related goods/services (substitutes and compliments)
Supply Curve - represents the relationship between the price of a good and the quantity supplied in the
market. Shows quantity supplied based on different prices when all other factors remain the same.
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Law of Supply - as price of goods decrease, it’s quality supplied also decreases and vice versa
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A supply curve that follows this law is “upward sloping”
What shifts supply? Changes in:
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Technology
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Input prices
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Expectations
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Number of producers/manufacturers
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Price of related goods/services (substitutes and compliments)
Equilibrium Price (PE) - price at which market clears
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Quantity demanded = quantity supplied
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Point where supply and demand curves meet
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Equilibrium Quantity (QE)
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What happens when a price is not at equilibrium:
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Excess supply - quantity demanded < quantity supplied - at any price above equilibrium
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Excess demand - quantity demanded > quantity supplied - at any price below equilibrium
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Linear Demand Curve - straight line
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Following law of demand, appears “downward sloping straight”
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q = A - Bp
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q = quantity demanded
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p = price
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A,B = positive numbers
Linear Supply Curve - straight line
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Following law of supply, appears “upward sloping straight”
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q = C + Dp
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q = quantity supplied
Determining PE with linear curves
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Quantity demanded = quantity supplied
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Demand curve is q = 80 -3p
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Supply curve is q = 20 + p
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At equilibrium we have 80 - 3p = 20 + p
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80 - 20 = 3p + p
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60 = 4p
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60/4 = p
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15 = p