Introduction to Economics
Lecture 7: Supply and Demand
Date: July 8, 2024
Key Concepts
1. Basics of Supply and Demand
o Definition: The relationship between the quantity of a good or service that
producers are willing to sell and the quantity that consumers are willing to buy.
o Law of Demand: As the price of a good decreases, the quantity demanded
increases, and vice versa (ceteris paribus).
o Law of Supply: As the price of a good increases, the quantity supplied increases,
and vice versa (ceteris paribus).
2. Determinants of Demand
o Price: Inverse relationship with quantity demanded.
o Income:
Normal Goods: Demand increases as income increases.
Inferior Goods: Demand decreases as income increases.
o Prices of Related Goods:
Substitutes: Demand for a good increases if the price of a substitute rises.
Complements: Demand for a good decreases if the price of a complement
rises.
o Tastes and Preferences: Changes in consumer preferences can shift demand.
o Expectations: Future expectations about prices can influence current demand.
o Number of Buyers: More buyers increase demand.
3. Determinants of Supply
o Price: Direct relationship with quantity supplied.
o Input Prices: Higher input prices decrease supply.
o Technology: Technological advancements increase supply.
o Expectations: Future expectations about prices can influence current supply.
o Number of Sellers: More sellers increase supply.
o Taxes and Subsidies: Taxes decrease supply, subsidies increase supply.
4. Market Equilibrium
o Equilibrium Price: The price at which the quantity demanded equals the quantity
supplied.
o Surplus: Occurs when quantity supplied exceeds quantity demanded at a given
price.
o Shortage: Occurs when quantity demanded exceeds quantity supplied at a given
price.
o Adjustments: Prices adjust to eliminate surpluses and shortages, moving the
market toward equilibrium.
Key Terms
Supply and Demand
Law of Demand
Law of Supply
Equilibrium Price
Surplus
Shortage
Normal Goods
Inferior Goods
Substitutes
Complements
Important Points to Remember
The interaction of supply and demand determines market prices and quantities.
Shifts in supply and demand curves result from changes in their respective determinants.
Market equilibrium is achieved when quantity demanded equals quantity supplied,
eliminating surpluses and shortages.
Questions for Further Study
1. How do external factors like government policies and global events affect supply and
demand?
2. What are the long-term effects of technological advancements on supply?
3. How do changes in consumer income levels impact the demand for normal and inferior
goods?
Readings
Textbook: Chapter 3, "Supply and Demand"
Articles:
o "Market Dynamics and Price Adjustments" by Dr. Williams
o "Impact of Technology on Supply Chains" by Dr. Davis
Next Lecture: Elasticity of Demand and Supply
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