⚖️ Supply and Demand

Definition: The foundational model of market economics describing how the price and quantity of goods are determined through the interaction of buyers (demand) and sellers (supply). The market-clearing price is where supply equals demand.

Foundation of nearly all economic analysis — both micro and macro.

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📈 Demand

The Law of Demand: As price increases, quantity demanded decreases — all else equal.

$Q_D=f(P,\text{Income},P_{substitutes},P_{complements},\text{Preferences},\text{Expectations})$

The Demand Curve

Price
  │\
  │  \
  │    \          (Downward sloping)
  │      \
  │        \
  └──────────────→ Quantity

Shifts in Demand (moving the curve)

The demand curve shifts (not movement along) when:

Shift Factor	How Demand Changes
Income rises (normal good)	Demand increases → curve shifts right
Income rises (inferior good)	Demand decreases → curve shifts left
Substitute’s price rises	Demand increases (e.g., Pepsi up → Coke demand up)
Complement’s price rises	Demand decreases (e.g., gas prices up → SUV demand falls)
Consumer preferences shift	Depends on direction
Positive future expectations	Demand increases now

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📉 Supply

The Law of Supply: As price increases, quantity supplied increases — all else equal.

$Q_S=f(P,\text{Input Costs},\text{Technology},\text{Number of Sellers},\text{Government Policy})$

The Supply Curve

Price
  │          /
  │        /
  │      /          (Upward sloping)
  │    /
  │  /
  └──────────────→ Quantity

Shifts in Supply

Shift Factor	How Supply Changes
Input costs fall	Supply increases → curve shifts right
Technology improves	Supply increases
More sellers enter	Supply increases
Government subsidy	Supply increases
Government tax/regulation	Supply decreases

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⚖️ Market Equilibrium

Equilibrium: Where supply = demand. The price that clears the market.

Price
  │    S
  │   /\
  │  /  \
P*│ /    \← Equilibrium
  │/  D   \
  └──────────→ Quantity
       Q*

At prices above P*: Surplus (supply > demand) → price falls toward equilibrium At prices below P*: Shortage (demand > supply) → price rises toward equilibrium

Price mechanism: Markets are self-correcting through price signals.

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🎯 Business Applications

Price Elasticity

$E_d=\frac{\%\Delta Q_D}{\%\Delta P}$

| |E| | Type | Business Implication | |---|------|---------------------| | > 1 | Elastic | Lower price → more revenue | | = 1 | Unit elastic | Revenue unchanged | | < 1 | Inelastic | Raise price → more revenue |

Factors creating inelasticity: Few substitutes, necessities, small budget share, addiction, high switching costs.

Consumer and Producer Surplus

Price
  │\
  │  \
  │ CS \← Consumer Surplus (value captured by buyers)
P*│────.\────
  │  PS .\← Producer Surplus (value captured by sellers)
  │        \
  └──────────→ Quantity
              Q*
CS = buyer's value - price paid
PS = price received - seller's cost
Total Surplus (Social Welfare) = CS + PS

Policy implication: Price controls (ceilings/floors) reduce total surplus → deadweight loss.

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🏭 Market Structures

Structure	# Sellers	Product	Price Control	Example
Perfect Competition	Many	Homogeneous	None (price taker)	Wheat, gold
Monopolistic Competition	Many	Differentiated	Some	Restaurants, clothing
Oligopoly	Few	Homogeneous or differentiated	Significant	Airlines, autos, tech
Monopoly	One	Unique	Full (price setter)	Utilities, OS (historically)

Oligopoly is most strategically interesting — Game Theory applies here.

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🔗 Connected Concepts

• Game Theory — Supply/demand in oligopolies → strategic pricing
• Pricing Strategies — Business application of demand curves and elasticity
• Behavioral Economics Overview — Real demand curves deviate from rational model
• Break-Even Analysis — Supply-side cost structure combined with demand
• Monetary Policy — Fed rate changes shift aggregate demand curves

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← 📈 Economics MOC | Related: Game Theory · Pricing Strategies · Behavioral Economics Overview