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CHAPTER 3: DEMAND AND SUPPLY LECTURE NOTES
ECON 211: Microeconomics Principles
Arizona State University
Student’s Name
Spring 20
Supply and Demand
The two core ideas that make up economics' framework are supply and demand. They are the
factors that control market prices for goods and services. Simply put, supply and demand refer to
the quantity of a certain good or service that manufacturers are prepared and able to sell at a
given price and the quantity of that same good or service that consumers are willing and able to
purchase at that price, respectively. For an understanding of how markets work and prices are
established, demand and supply must be understood in their interaction.
The cost of the commodity or service, consumer income, customer preferences and tastes, and
the availability of alternatives are only a few of the variables that affect demand. Ceteris paribus
(all other factors being equal), the amount sought rises when an item or service's price falls. The
demand for an item or service declines as its price rises, on the other hand. The law of demand
refers to this connection between price and quantity requested. It implies that when a product or
service is less expensive, buyers are more likely to buy it and less inclined to do so when it is
more expensive.
The cost of production, the methods of production used, the cost of the good or service, and the
ease of access to resources, on the other hand, all have an impact on supply. Ceteris paribus,
when the cost of a commodity or service rises, so does the amount offered. The law of supply
refers to this link between price and amount delivered. It suggests that when it is more
advantageous to do so, producers are more motivated to make and offer for sale an item or
service.
The link between supply and demand determines the market price and quantity of an item or
service. The cost at which the quantity offered and the quantity sought are equal is known as the
market price, sometimes known as the equilibrium price. There is neither an excessive supply
nor an excessive demand at the equilibrium price, and the market clears. Depending on whether a
price is greater or lower than the equilibrium price, any price differential causes either a shortage
or a surplus.
Demand and supply ideas must be understood by all parties, including consumers, corporations,
and legislators. To make successful choices, businesses must comprehend the demand for their
goods and the pricing that customers are prepared to pay. The impacts of policies on supply and
demand, as well as how they affect pricing and welfare, must be understood by policymakers.
Consumers must comprehend how shifting costs and earnings impact their spending patterns and
general well-being.
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The prices in the market
In a market economy, prices play a significant role in determining what goods and services are
produced, how they are produced, and for whom.
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Prices act as indicators that communicate vital information about the availability and demand of goods and
services.
Demand and Supply
Supply and demand are two of the most basic elements that affect market pricing. A item or
service's price will normally rise when there is a strong demand for it and a limited supply of it.
In contrast, an item or service's price will often go down when there is little demand for it and a
lot of supply. One of the pillars of economics is the law of supply and demand, which explains
this relationship between supply and demand.
Consumer Influence
In addition to supply and demand, market power may have an impact on market price.
Market power is the ability of a corporation or group of enterprises to influence market
outcomes, such as price, production, and competition.
A corporation with market strength may charge more for its goods or services than it would in a
market with more competitors. Market dominance may result from a number of things, including
economies of scale, ownership of intellectual property, or control over vital resources.
Governmental Involvement
Governments may also affect market pricing by intervening in different ways. Governments, for
instance, may control pricing in sectors like healthcare or energy to make sure that customers are
not overcharged. In order to affect pricing, governments may also levy taxes or subsidies on
certain commodities or services. Governments may also implement price restrictions, such as
establishing minimum and maximum costs for products and services.
Market Performance
Finally, market pricing can also be influenced by market efficiency. The degree to which prices
accurately represent all information regarding the supply and demand for an item or service is
referred to as market efficiency. Prices are anticipated to correctly represent the fundamentals of
supply and demand when markets are functioning efficiently. But when markets are inefficient,
prices may diverge from their true value, opening doors for market manipulation and arbitrage.
In a market economy, prices play a key role. They have a crucial role in determining what
things are produced, how they are produced, and for whom.
Understanding the market factors that influence price, such as supply and demand, market
power, government intervention, and market efficiency, is essential for policymakers,
consumers, and businesses alike. By comprehending these elements, we may better anticipate
price fluctuations, react to them, and choose our own economic conduct.
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Demand
The amount of an item or service that customers are willing and able to purchase at a
certain price and time is referred to as demand.
The idea of demand is crucial to understanding how markets operate in economics.
Demand-affecting variables
Price: When the cost of an item or service rises, demand often declines and vice versa.
Income: As income rises, so does the amount of normal items required, while the number
of inferior goods requested falls.
Preferences: Demand for an item or service may be significantly impacted by customer
preferences.
Substitutes' accessibility: If there are numerous alternatives to an item or service, demand
for that good or service may decline.
Demographics and population: Demand may be impacted by changes in demographic
variables including age, gender, and income distribution.
Demand categories
Individual demand is the amount of an item or service that one customer is willing and
able to purchase at a certain price and time.
The total of all individual wants for a certain commodity or service at a specific price and
time is known as the market demand.
Demand peaks
A demand curve depicts the connection between the quantity desired at a given price and
the price of an item or service.
The demand curve slopes downward, which indicates that if an item or service's price
rises, less of it will be requested and vice versa.
The law of demand
According to the law of demand, demand for an item or service will decline as its price rises and
vice versa, all other things being equal.
Demand elasticity at a price
Price elasticity of demand gauges how sensitive a quantity is to price fluctuations.
A item or service is considered "price elastic" if the quantity required is highly
sensitive to price variations.
A item or service is said to be "price inelastic" if the quantity required does not
vary significantly in response to price variations.
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Examples of how demand and amount requested have changed
If the price of coffee drops, the demand curve for coffee will move along with it,
increasing the amount of coffee that is wanted. The amount required has changed.
The demand curve for coffee might vary due to a shift in customer tastes towards
healthier drinks, which would affect the amount requested at each price point.
This indicates a shift in demand.
Supply
The link between the price of an item or service and the amount of that good or service that
producers are willing and able to provide for sale at a certain moment is described by the basic
economic notion of supply. Or to put it another way, supply is the volume of an item or service
that manufacturers are prepared to offer at a certain price point.
The law of supply, which states that, all other things being equal, when the price of an item or
service increases, so will the amount offered of that good or service, is one of the most
fundamental concepts in economics. Higher pricing encourage producers to make and sell more
of the item or service in order to increase profits, which is why this is the case. In contrast, if a
products or service's price drops, the quantity offered will likewise drop since manufacturers
may not be able to recoup their expenses of production.
Supply-Related Factors
The supply of an item or service may be impacted by a number of variables, including:
a)
Cost of production: One of the main factors influencing the supply of a products or
service is the price of producing it. Producers may decide to decrease their output of a
good if its production costs rise since doing so makes it less lucrative to do so. On the
other side, if a good's production costs drop, manufacturers could be more motivated to
provide it since they will be able to sell it for more money.
b)
Technology: New developments in technology may have an impact on the availability of
an item or service. By increasing manufacturing efficiency and lowering production
costs, new technologies may enhance supply.
c)
Taxes and other government subsidies, for example, might have an impact on the
availability of an item or service. For instance, a subsidy that lowers the cost of
producing an item could result in more supply.
d)
Resources: The supply of an item or service may also be impacted by the availability of
resources like labor and raw materials. When a resource is costly or rare, it may be harder
or more expensive to manufacture the commodity or service, which will reduce supply.
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e)
Number of suppliers: The availability of an item or service may be impacted by the
number of providers in a market. The total supply of an item may be greater if there are
more producers, each with a small market share, than if there are fewer manufacturers,
each with a bigger market share.
Provider Curve
The link between the cost of an item or service and the volume provided is represented
graphically by the supply curve. The rising slope of the supply curve indicates that when the cost
of a commodity or service rises, so will the amount provided. The elasticity of supply, which
measures how sensitive producers are to changes in the price of an item or service, determines
the slope of the supply curve.
Market Stability
The market equilibrium prices and quantities are determined by the point where the supply and
demand curves cross. There is neither an excess supply nor an excess demand in the market
when the amount provided of an item or service is equal to the quantity required.
Determining Price and Quantity in Equilibrium
Market equilibrium in economics refers to the situation when the amount of an item or service
that customers want and the amount that producers are willing to provide are equal, resulting in a
steady quantity and price. There isn't an excessive amount of either supply or demand in the
market right now.
The combination of supply and demand, which together produce the market equilibrium, affects
how a market's price and quantity are determined. The equilibrium price and quantity are the
price and quantity, respectively, at which the market is in equilibrium.
Consumer Demand
The entire quantity of an item or service that customers are willing and able to purchase at a
certain price level is referred to as market demand. Several factors, such as the following, have
an impact on the demand for a good or service:
Price of the Good or Service: When all other factors are equal, the quantity required of a
Good or Service tends to decline as its price rises. On the other hand, the amount
requested often rises when an item or service's price lowers.
Consumer income: The amount of consumer income has an impact on demand for goods
and services as well. Consumers may be willing and able to buy more of a commodity or
service if their income rises, which would raise demand. In contrast, the demand for an
item or service may decline if consumer income declines.
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Price of related products: Related goods' costs, such as alternatives and complements,
may have an impact on demand for a product or service. The demand for the original
item may rise if the price of a replacement good rises because customers may choose the
less expensive option instead. The demand for the original commodity may fall, on the
other hand, if the cost of a complementary good rises.
Market Providers
The complete quantity of an item or service that producers are ready and capable to sell at a
certain price level is referred to as market supply. A number of variables, such as the following,
have an impact on the supply of an item or service:
Production costs: The price to produce an item or service might affect how much of it is
available. Producing a thing or service becomes less viable when production costs rise,
thus producers may decide to provide less of the commodity or service.
Technology: New developments in technology have the potential to boost production
efficiency and lower the cost of creating a thing or service, which will increase supply.
Number of suppliers: The availability of an item or service in a market may also be
impacted by the number of providers. The total supply of an item may be greater if there
are more producers, each with a small market share, than if there are fewer
manufacturers, each with a bigger market share.
Market Stability
Market equilibrium happens when the amount of an item or service that is requested and
provided are the same, leading to a steady price and quantity. There isn't an excessive amount of
either supply or demand in the market right now.
The point where the supply and demand curves connect determines the equilibrium price and
quantity. The supply curve depicts the connection between an item or service's price and the
quantity delivered, while the demand curve depicts the relationship between a good or service's
price and the quantity desired.
A stable market results when the quantity provided and the quantity requested are equal at the
equilibrium price. There will be excess demand if an item or service's price is lower than the
equilibrium price because more people will want to buy it than the producer is willing to sell it.
In contrast, there will be an excess supply if an item or service's price is higher than the
equilibrium price since producers will be prepared to offer more of it than customers are willing
to purchase.
Conclusion
The quantity of a certain product or service that producers are prepared and able to
provide for sale at a particular price and time is referred to as the supply. knowledge
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market dynamics in economics also requires a knowledge of the idea of supply. The cost
of manufacturing, the accessibility of resources, the technology used in production, and
the pricing of the good or service may all have an impact on supply.
According to the law of supply, a rise in price causes an increase in the quantity of an
item or service provided, while a drop in price causes a decrease in the quantity given, all
other things being equal. The upward-sloping supply curve represents the link between
price and amount delivered. The market clears and the price and volume transacted are
decided when supply and demand are in balance.
Businesses must have a thorough understanding of supply and demand in order to decide
on pricing and output levels. The potential effects of policies on supply and demand,
which might eventually have an influence on price and welfare, must also be considered
by policymakers. Consumers must be aware of how shifting costs and incomes might
impact their spending patterns and general well-being. In conclusion, supply and demand
are important ideas that influence market dynamics, and everyone involved in the
economy has to grasp them.
