Supply and Demand

Equilibrium

Demand	The quantity that a consumer will purchase for a given price
Supply	The quantity of goods/services that a supplier is willing and able to supply at each price point (for price-takers)
Equilibrium	Where supply and demand curves intersect is the equilibrium market price and quantity.

Non-equilibrium

When the market is not in equilibrium, a shortage or surplus of quantity results at any given price.

Surplus	At a price that is higher than equilibrium price, the quantity that suppliers are willing to supply is greater E.g. price floor such as minimum wage
Shortage	At a price that is lower than equilibrium, the quantity that consumers are willing to purchase is greater E.g. price ceiling such as cap on rents

Shifts of the Supply and Demand Curves

Usually, price and quantity changes happen along the supply and demand curves.
When there is a shock from external factors, the whole supply or demand curve can shift itself (i.e. the quantity demanded or supplied at a given price changes).

Supply Shock

Supply curve shifts due to

•Cost of inputs

•Technology

•Government Regulations

Demand Shock

Demand curve shifts due to

Demand curve shifts due to:

Income
Consumer preferences
Prices of complementary or substitute goods
Future expectations

Elasticity

Economic elasticity refers to the degree of change in quantity for a given change in price.
More elastic goods experience more change in demand for a given change in price.

•More Elastic Goods:
If the price goes up by 1%, demand decreases by > 1% as there are substitutes available

•E.g. soft drinks, clothing

Less Elastic Goods

•If the price goes up by 1%, demand changes by <1% as consumers don’t have much of a choice

•E.g. transport costs, utilities, medicines

Perfectly Elastic Goods

•If prices increase, consumers stop spending on these goods, often luxury goods

•E.g. holidays such as cruises

Perfectly Inelastic Goods

•Regardless of the change in price, there will always be demand

•E.g. necessities with no close substitutes such as life-saving medicines

Taxes and Subsidies

Taxes and subsidies on producers cause shifts in the supply curve.
A tax results in a greater price for a given quantity.
A subsidy results in a lower price for a given quantity.