Sunday, 13 June 2010

Economics -- Basic Demand and Supply

Demand = Want + purchasing power = willingness + ability to buy
An individual demand of a good refers to the quantities that a buyer is able (purchasing power) and willing to buy at different prices over a period of time, ceteris paribus. We draw the demand curve that P (price) on the y-axis and Q (units/time) on the x-axis to draw a demand curve. Quantity demanded (Qd) is the quantity that a buyer is willing and able to buy at a particular price over a period of time. Graphically demand is the whole curve and Qd refers to one single point on the curve. Note that Qd is the quantity that is planed to buy, but not the actual unit bought (transected). Demand schedule is a table to show the Qd at different prices.
Individual demand curve: shows P VS Qd of a good to an individual buyer.
Market demand curve: shows P VS Qd of a good for all individual buyers.
The market demand curve is the horizontal summation of all individual demand curves.
Law of demand: the demand curve is ↓slopping, ↑P↓Qd, we can also say that the P and Qd is inversely related, ceteris paribus.
Supply = Willingness + ability to sell
Individual supply, supply curve shares the similar explanation with the terms about demand.
Law of supply: supply curve is ↑slopping, ↑P↑Qs or positively related, ceteris paribus.
Note that quantity transected = min{Qs,Qd}.
Equilibrium (market-clearing) price: At Pe, Qs=Qd and we denote the equilibrium quantity as Qe. In this case the price will have no tendency to change, ceteris paribus. At that price quantity is equal to the equilibrium quantity. Note that when the two curves have no intersection the equilibrium price will be zero (free goods). The equilibrium quantity will be zero too since there will be no need for transaction.
When PPe, excess goods/surplus appears and there’re unsold goods. In this case sellers may raise the price to make consumers buy more until the price reaches the equilibrium.
The automatic change of price is called the price system or market mechanism.
Money price: price expressed in terms of money, relative price: price expressed in terms of another good. Note that the relative price also obeys the law of demand, given the price of the good for comparison remains unchanged.
Consider the relative price of X is k units of good Y where k>1. If the price of X,Y raised the same amount, then the new relative price of X will be k’ units of Y, where k’beef and leather) Qs of X↑→ supply of Y↑
2) Competitive supply which requires similar factors of production, Qs of X↑→ supply of Y↑
3) Prices of inputs (price of factors of production)↑ → Supply↓
4) State of Technology, # of producers and other factors

Ceteris paribus: everything being kept constant.

Note that the affect of new equilibrium price change will not be shown here since it is a table.

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