ECON1010 (Lec 04) - The Market Forces of Supply and Demand

The Market Forces of Supply and Demand

Introduction

• Supply and demand are fundamental concepts in economics.
• They drive market economies, influencing prices and quantities.

Markets and Competition

• A market is a group of buyers and sellers for a specific good or service.
• Buyers determine demand, while sellers determine supply.
• Competitive markets have many buyers and sellers, minimizing individual impact on prices.

Types of Competition

1. Perfect Competition
   • Identical products
   • Numerous buyers and sellers
   • Price takers
2. Monopoly
   • Single seller controls price
3. Oligopoly
   • Few sellers
4. Monopolistic Competition
   • Many sellers with slightly differentiated products

Demand

• Quantity demanded is what buyers are willing and able to purchase.
• Law of Demand: Quantity demanded decreases as price increases.
• Demand Schedule: Table showing price-quantity relationship.
• Demand Curve: Graphical representation of the relationship.

Factors Affecting Demand

• Change in Quantity Demanded (Movement along the curve)
• Change in Demand (Shift in the curve)
  • Consumer income
  • Prices of related goods
  • Tastes
  • Expectations
  • Number of buyers

Supply

• Quantity supplied is what sellers are willing and able to sell.
• Law of Supply: Quantity supplied increases as price increases.
• Supply Schedule: Table showing price-quantity relationship.
• Supply Curve: Graphical representation of the relationship.

Factors Affecting Supply

• Change in Quantity Supplied (Movement along the curve)
• Change in Supply (Shift in the curve)
  • Input prices
  • Technology
  • Expectations
  • Number of sellers

Supply and Demand Together

• Equilibrium: Price where quantity supplied equals quantity demanded.

Components of Equilibrium

• Equilibrium Price: Balances supply and demand.
• Equilibrium Quantity: Quantity supplied and demanded at the equilibrium price.

Equilibrium Conditions

• Surplus: Excess supply, prices decrease.
• Shortage: Excess demand, prices increase.
• Law of supply and demand: Prices adjust to balance quantity supplied and demanded.

Analyzing Changes in Equilibrium

1. Identify whether the event affects supply, demand, or both.
2. Determine the direction of the shift (left or right).
3. Use supply-and-demand diagram to analyze changes in price and quantity.

Summary

• Model of supply and demand analyzes competitive markets.
• Demand curve shows price-quantity relationship.
• Law of demand: Price decrease leads to quantity demanded increase.
• Supply curve shows price-quantity relationship.
• Law of supply: Price increase leads to quantity supplied increase.
• Market equilibrium determined by supply and demand intersection.
• Prices in market economies guide economic decisions and resource allocation.