The microeconomy:

Demand, supply, market dynamics & equilibrium

Market:

Where buyers & producers negotiate an exchange of goods/services & a price.



Assumptions:

  1. Many buyers; many producers (competition)
  2. Short-run (not enough time for producers to purchase new capital)




Product (widgets):

Price: Demand (units): Supply (units):
$
100
 40 10
$
110
 35 15
$
120
 30 20
$
130
 25 25
$
140
 20 30
$
150
 15 35
$
160
 10 40


@ price=$150: surplus of 20.

Solution: Lower price (employment drops).

As price drops, consumers buy more & the surplus vanishes.

@ price=$110: deficit of 20.

Solution: Increase price (employment increases).

As price increases, consumers buy less & the deficit vanishes.



Changes in demand VS changes in quantity demanded:

Case 1: govt imposes a rent ceiling in rental accommodations.

A shortage of rental units occurs.



Case 2: real consumer income rises.

Mechanics of change:

1. Consumers want more widgets @ each possible price than before.

2. Demand shifts to the right.

3. For a short time, D>S & a shortage occurs.

4. Eventually production & price rise to form a new equilibrium.



Other factors causing demand change:

1. Consumer population change.

2. Trends/fads.

3. Expectations.

4. Income of consumers.

5. Quality.

6. Price of substitutes.

7. Price of complements.