3.2 DEMAND, SUPPLY & EQUILIBRIUM

• Demand: the quantity of a good / service consumers are willing & able to buy at a given time period
• Law of demand: there is an inverse relationship between price and quantity demanded. As price increases the quantity demanded decreases and vice versa assuming Ceteris Paribus
• When price increases we have a contraction of demand 

  When price decreases we have an expansion of demand
• LAW OF DEMAND :

  When the price of a good increases, the quantity demanded decreases. This occurs due to:

  • The substitution effect
  • the income effect
• Substitution Effect: Consumers substitute more expensive goods with cheaper alternatives.
• Income Effect: Higher prices reduce consumers' purchasing power, causing them to buy less.
• demand curves typically imply a positive relationship between the price of a given good or service and the quantity supplied of that good / service, other things equal
• demand is the quantity of a good / service consumers are willing and able to buy of a given price in a given time period.
• law of demand: there is an inverse relationship between price & quantity demanded, as price increases Qd decreases and vice versa, assuming Ceteris Paribus
• The non price factors that affect demand:

  When Ceteris Paribus is dropped these are the factors that affect demand :

  • Population
  • advertising
  • substitute's price
  • income
  • fashion / tastes
  • interest rates
  • complement's price
• Population : the more the population, the more demand
• Advertising: good ads increases willingness to buy, increasing demand
• Substitutes price: if the substitute’s price increases, demand for this good increases 
• Substitutes price: if the substitute’s price increases, demand for this good increases 
• Income: the higher the income, the more buying power, so demand increases for normal goods
• Fashion / Tastes: if a good is fashionable the demand increases
• Interest Rates: if go down, cheaper to borrow, demand increases
• Complement’s Price: if they go up, demand goes down
• If demand increases there is a shift to the right, if it decreases it shifts to the left.
• supply: The quantity of a good/service that producers are willing and able to product at a given price in a given time period
• • As price increases, suppliers have more incentive to produce, leading to an increase in the quantity supplied. This is known as the law of supply.
• Law of supply:

  There is a direct relationship between price and quantity supplied. As the price increases quantity supplied increases and vice versa, assuming Ceteris Paribus. 

  WHY?

  • There is a profit motive for producers 
• As price increases, supply increases & we have an extension of supply 

  As price decreases, supply decreases & we have a contraction of supply
• Equilibrium Price: Where the quantity demanded equals the quantity supplied.
• Equilibrium Quantity: The quantity exchanged at equilibrium price
• Excess Demand (shortage): Occurs when the quantity demanded exceeds the quantity supplied at a particular price.
• Excess Supply (surplus): Occurs when the quantity supplied exceeds the quantity demanded at a particular price.
• • Prices adjust naturally in markets to clear excess demand or excess supply, moving toward equilibrium. For example:
  • If the price is above equilibrium, suppliers will reduce prices due to unsold stock.
  • If the price is below equilibrium, shortages occur, driving prices up as demand outstrips supply.
• Supply: Refers to the quantity of goods sellers are willing to sell at different prices.
• The Law of Supply: as price increases, suppliers have more incentive to produce, leading to an increase in the quantity supplied.
• Equilibrium Price: Where the quantity demanded equals the quantity supplied.
• Substitution Effect: Consumers substitute more expensive goods with cheaper alternatives.
• Income Effect: Higher prices reduce consumers' purchasing power, causing them to buy less.
• the demand curve, which is downward-sloping, shows the inverse relationship between price and quantity demanded.
• The supply curve is upward-sloping, reflecting the positive relationship between price and quantity supplied.
• Prices adjust naturally in markets to clear excess demand or excess supply, moving toward equilibrium.
• If the price is above equilibrium, suppliers will reduce prices due to unsold stock.
• If the price is below equilibrium, shortages occur, driving prices up as demand outstrips supply.