Class Notes: Introduction to Microeconomics

Date: May 27, 2024

Instructor: Prof. John Doe

Class Topic: Supply and Demand

1. Introduction to Supply and Demand

Definition: Supply and demand are fundamental concepts that describe how goods
and services are allocated in a market economy.
Law of Demand: As the price of a good decreases, the quantity demanded increases,
ceteris paribus.
Law of Supply: As the price of a good increases, the quantity supplied increases,
ceteris paribus.
2. Demand
Demand Curve: Graphically shows the relationship between the price of a good and
the quantity demanded.
Downward Sloping: Reflects the inverse relationship between price and quantity
demanded.
Determinants of Demand:
Income: Normal goods (demand increases as income increases) vs. inferior goods
(demand decreases as income increases).
Prices of Related Goods: Substitutes (demand increases when the price of a
substitute rises) and complements (demand decreases when the price of a
complement rises).
Tastes and Preferences: Changes can increase or decrease demand.
Expectations: Future expectations of prices and income can affect current demand.
Number of Buyers: More buyers increase demand.
3. Supply
Supply Curve: Graphically shows the relationship between the price of a good and
the quantity supplied.
Upward Sloping: Reflects the direct relationship between price and quantity
supplied.
Determinants of Supply:
Production Technology: Advances can reduce costs and increase supply.
Input Prices: Higher input costs decrease supply.
Expectations: Future expectations of prices can affect current supply.
Number of Sellers: More sellers increase supply.
Government Policies: Taxes, subsidies, and regulations can affect supply.
4. Market Equilibrium
Equilibrium Price: The price at which the quantity demanded equals the quantity
supplied.
Equilibrium Quantity: The quantity bought and sold at the equilibrium price.
Surplus: Occurs when quantity supplied exceeds quantity demanded at a given price
(leads to downward pressure on price).
Shortage: Occurs when quantity demanded exceeds quantity supplied at a given
price (leads to upward pressure on price).
5. Shifts vs. Movements
Movement along the Curve: Caused by a change in the price of the good itself.
Shift of the Curve: Caused by a change in any non-price determinant.
Demand Curve Shifts: Due to changes in income, tastes, prices of related goods, etc.
Supply Curve Shifts: Due to changes in technology, input prices, number of sellers,
etc.
6. Elasticity
Price Elasticity of Demand: Measures the responsiveness of quantity demanded to a
change in price.
Elastic Demand: Quantity demanded changes significantly with a small change in
price (elasticity > 1).
Inelastic Demand: Quantity demanded changes little with a change in price (elasticity
< 1).
Price Elasticity of Supply: Measures the responsiveness of quantity supplied to a
change in price.
Elastic Supply: Quantity supplised changes significantly with a small change in price.
Inelastic Supply: Quantity supplied changes little with a change in price.
7. Applications of Supply and Demand
Price Ceilings: Legal maximum prices (e.g., rent control) can lead to shortages.
Price Floors: Legal minimum prices (e.g., minimum wage) can lead to surpluses.
Taxes and Subsidies: Affect equilibrium by shifting supply and/or demand curves.
Reading Assignment:
Textbook: Chapter 3 - Supply and Demand
Article: "The Impact of Government Intervention in Markets" (available on the
course website)
Homework:
Complete the supply and demand graphing exercises on the course website and
submit your answers.
Upcoming Topics:
Next class: Elasticity and Its Applications
Read Chapter 4 in the textbook.
Announcements:
Quiz on May 30th covering Chapters 1-3. Review session on May 29th.
End of Class Notes