Supply Demand Economics

Demand Notes

Law of Demand:  the quantity demanded of a good or service in a given time period declines as its price rises

* Social forces shape demand; the strength of a person’s want for a good (reservation price) may also increase as the number of other users of that good grows

* Once we have achieved minimum subsistence levels of consumption, we abandon all reference to needs and only in terms of wants

Utility:

* Rational people try to allocate their incomes to maximise utility

* Law of diminishing marginal utility: the tendency for marginal utility to decline as consumption increases beyond some point

* Utils per kg / Cost per kg = Utils per dollar

* Rational Spending Rule:

* Marginal utility1Price1= Marginal utility2Price2

* Buy more of the good with higher utils to even out the utils per dollar BUT remember to consider the marginal utility

Recall: increase in the price of a good reduces real income and shifts the demand curve for a normal good to the left

Demand curves:

For more than one person: The quantity demanded at any price on the market demand curve is the sum of the individual quantities demanded at that price. (AKA Horizontal addition)

Note: When a product can be sold only in whole-number amounts, its demand curve has the ‘staircase’ shape

Consumer surplus = triangle between highest price demanded and equilibrium price:

Producer surplus = triangle between lowest price supplied and equilibrium price

Supply Notes

Multiple supply curves: To generate the market supply curve from the individual supply curves, we add the individual supply curves horizontally.

If there were many suppliers with individual supply curves identical, we could generate the market supply curve by simply multiplying each quantity on the representative individual supply curve by the number of suppliers.

Perfectly competitive markets: markets in which individual firms have no influence over the market prices of the...