Microeconomics: Supply, Demand, and Market Equilibrium

Microeconomics: Supply and Demand

Market Fundamentals

Supply and demand are fundamental concepts in economics, driving market dynamics. Modern microeconomics focuses on these forces and their impact on market equilibrium.

Markets

A market consists of buyers and sellers interacting to exchange goods or services. Buyer behavior determines demand, while seller behavior determines supply.

Types of Markets

Competitive Market

A competitive market involves numerous buyers and sellers, preventing any single entity from controlling the price. Prices fluctuate within a narrow range, balancing the interests of buyers and sellers.

Perfect and Imperfect Competition

Perfect Competition

Characterized by identical products, numerous buyers and sellers, and no individual influence on price. Participants are price takers.

Monopoly

A single seller controls the market and dictates the price.

Oligopoly

A few sellers operate in the market, with limited competition.

Monopolistic Competition

Many sellers offer slightly differentiated products, allowing some individual price setting.

Demand

Quantity Demanded

The amount of a good that buyers are willing and able to purchase at a given price.

Law of Demand

States the inverse relationship between price and quantity demanded: as price increases, quantity demanded decreases.

Demand Schedule

Illustrates the relationship between a good's price and the quantity demanded.

Determinants of Demand

• Market Price
• Consumer Income
• Prices of Related Products
• Tastes
• Expectations

Demand Curve

A downward-sloping line representing the relationship between price and quantity demanded.

Ceteris Paribus

A Latin phrase meaning "all other things being equal." The demand curve's downward slope assumes that all factors other than price remain constant.

Market Demand

The sum of all individual demands for a specific good or service.

Changes in Demand

Change in Quantity Demanded

Movement along the demand curve caused by a change in the product's price.

Change in Demand

A shift of the entire demand curve to the right (increase) or left (decrease) due to a change in any factor other than price.

Consumer Income

• Normal Good: Demand increases as income increases.
• Inferior Good: Demand decreases as income increases.

Prices of Related Goods

• Substitutes: A price decrease for one good reduces demand for the other.
• Complements: A price decrease for one good increases demand for the other.

Supply

Quantity Supplied

The amount of a good that sellers are willing and able to offer at a given price.

Law of Supply

States the direct (positive) relationship between price and quantity supplied: as price increases, quantity supplied increases.

Determinants of Supply

• Market Price
• Factor Prices (input costs)
• Technology
• Expectations
• Number of Producers