Microeconomics

4.0 Markets

4.1 Supply & Demand

1. Industry Supply Curve
    All things being equal, the higher the price of a good or services, the greater  the quantity supplied.  This is the Law of Supply.  
    The supply curve (and schedule) shows the relationship between the price of a good or service and the quantity supplied by producers.  In effect, the curve shows the minimum price producers' will accept to provide a given quantity of a good or service.  All things being equal, the supply curve will be upward sloping reflecting the law of supply: the higher the price, the greater the supply; the lower the price, the less the supply.  Assuming other factors do not change, there will be movement along the supply curve as the price of the good or service changes.
    The supply curve can, however, shift, if other factors change (MBB 10th & 11th Eds.Fig. 3.7; PB 4th Ed. Fig. 4.10; 5th Ed. Fig. 3.9).  A shift in the supply curve can result due to changes in:

i - Price of Factors of Production;
ii - Expected Future Prices;
iii - Number of Suppliers; and,
iv - Technology.

    The supply curve for individual firms will show different levels of output at different prices.  However, at any given price we can sum up the amount all firms are willing to supply.  Hence, the industry supply curve is equal to the horizontal summation of the individual supply curves of each producer.

2. Industry Demand Curve
    All things being equal, the higher the price of a good or services, the smaller the quantity demanded.  This is the Law of Demand.  Among other things the law reflects the substitution and income effect of a price increase on the quantity of a good demanded by consumers.

i - Substitution Effect: when the price of a good increases it does so relative to all other goods.  Although each good is unique it has substitutes - other goods that will serve almost as well.  As the opportunity cost of a good rises, people will tend to buy less of it and more of its substitutes.

ii - Income Effect: when the price of a good rises, all things being equal, it rises relative to income.  Faced with a higher price and an unchanged income, the quantity of at least some goods and services must decrease.

 The demand curve (and schedule) shows the relationship between the price of a good or service and the quantity demanded.  In effect the curve shows consumers' 'willingness to pay' and 'ability to pay' to obtain a given quantity of a good or service.  All things being equal, the demand curve will be downward sloping reflecting the law of demand: the higher the price, the lower the demand; the lower the price, the greater the demand.  Assuming other prices remain constant and other factors do not change, there will be movement along the demand curve as the price of the good or service changes.
    The demand curve can, however, shift, if other prices or other factors change (MBB 10th & 11th Eds.Fig. 3.7; PB 4th Ed. Fig. 4.9; 5th Ed. Fig. 3.8).  A shift in the demand curve can result due to changes in:

i - Price of Related Goods or Services;
ii - Income;
iii - Expected Future Prices;
iv - Population; and,
v - Preferences.

     The demand curve for individual consumers will show different levels of purchases at different prices.  However, at any given price we can sum up the amount all consumers are willing to buy.  Hence, the industry demand curve is equal to the horizontal summation of the individual demand curves of each consumer.

3. Markets
    Markets are any arrangement that enables buyers and sellers to get information and to do business with each other.  Put another way, markets are where demand meets supply.  Markets can be described by reference to, in addition to other things:

- whether they are geographic or commodity-based;

- whether or not they are in equilibrium and, if so, what type of equilibrium;

- their sensitivity to change (elasticity) in prices and incomes; and,

- whether or not anyone – consumer, producer or government – can influence price or, more generally, the terms of trade or exchange.