# Supply and Demand ## Introduction - Goals and Objectives - Identify what a market is. - Identify the determinants of demand and supply for a good and service - Forecast what happens to equilibrium price and quantity as a result of a change in the market conditions. - "How are you doing?" vs "May I buy you a drink?", the cost varies ## Demand - Factors affecting your quantity demanded -> ==the value side of the market== - Price - Price of related goods (complement, or substitute) - Your income - Your preference $ Q_x = f(P_x, P_y, I, T) $ - Demand schedule = price and quantity demanded table - Demand curve = price vs quantity demanded demand graph - Law of Demand = price increases, demand goes down, and vice versa. - Comparative Analysis = determine the initial situation and analyze the change > [!caution] Demand and Quantity Demanded > > When the price goes up or down, we move along the demand curve, but the _curve > itself_ is NOT shifted! We say that the demand or the value does NOT change in > this case, but the quantity demanded does. - When price of _complementary/substitute_ goods change, we have a change in Demand. - The increase in income may increase the demand. However, the demand for _inferior good_ may go down. ## Supply - Determinants of quantity of supply -> ==the cost side of the market== - Price - Price of inputs - Technology used $ Q_{xs} = f(P_x, P_\text{inputs}, \text{Tech}) $ - Supply Schedule and Supply Curve - Price over quantity supplied graph - Price goes up, the quantity supplied goes up. Note that the _supply_ does not change. ## Equilibrium - supply > demand = _supply surplus_, price goes down - supply < demand = _supply shortage_, price goes up - The price may never reach the _equilibrium_ point, but there is always a pressure towards it ## Using the Model of Supply and Demand - _ceteris paribus_ = assuming that everything else stays the same - If two changes happen at the same time and they oppose each other, we lose some of the explanatory power. > [!tip] > > The model of supply and demand forces you to organize your thinking. The more > complex the situation is, the more useful the model. ## Conclusion