Macroeconomics Chapter 4: Supply and Demand
The interaction of supply and demand in a market determines equilibrium price and quantity, with shifts in these curves leading to predictable changes in market outcomes.
Core Principles
- Law of Demand: As price increases, quantity demanded decreases, ceteris paribus.
- Law of Supply: As price increases, quantity supplied increases, ceteris paribus.
- Equilibrium: The point where quantity demanded equals quantity supplied, establishing the market price and quantity.
- Shifts vs. Movements: Changes in price cause movements along the curve; changes in other factors cause shifts of the entire curve.
Action Steps
- 1. Identify the good or service being analyzed.
- 2. Determine the factors affecting demand (income, prices of related goods, tastes, expectations, number of buyers).
- 3. Determine the factors affecting supply (prices of inputs, technology, number of sellers, expectations).
- 4. Graph the initial supply and demand curves to find the equilibrium price and quantity.
- 5. Analyze how changes in demand or supply factors shift the respective curves.
- 6. Determine the new equilibrium price and quantity after the shift.
Formulas
- Demand Equation: $Q_d = f(P, Y, P_s, P_c, T, E)$
- Supply Equation: $Q_s = f(P, P_o, Tech, N, E)$
- Equilibrium Condition: $Q_d = Q_s$
Key Terms
- Demand: The relationship between the price of a good or service and the quantity consumers are willing and able to purchase at various prices during a specific period.
- Supply: The relationship between the price of a good or service and the quantity producers are willing and able to offer for sale at various prices during a specific period.
- Equilibrium Price: The price at which the quantity demanded equals the quantity supplied.
- Equilibrium Quantity: The quantity of a good or service bought and sold at the equilibrium price.
- Ceteris Paribus: A Latin phrase meaning 'all other things being equal,' used to isolate the effect of one variable on another.
Real World Examples
- An increase in consumer income for normal goods.: This shifts the demand curve to the right, leading to a higher equilibrium price and quantity.
- A technological advancement in production.: This shifts the supply curve to the right, leading to a lower equilibrium price and a higher equilibrium quantity.
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