Study sheet: Supply, Demand and Market Equilibrium

📋 Course Outline

1. Inverse Demand Curve
2. Supply and Willingness to Accept
3. Supply Shifts and Determinants
4. Market Equilibrium
5. Market Shocks and Surplus
6. Price Regulation

📖 1. Inverse Demand Curve

📝 Essential Points

📐 Formula — The inverse demand function is $P=a+bQ$, with $a>0$ and $b<0$.

📌 A demand-curve shift is represented by a change in the intercept a, because when Q=0, P=a; a higher a places the curve farther to the right and a lower a places it farther to the left.

💡 Memory Hook

Intercept a shifts the curve; slope b changes sensitivity.

📖 2. Supply and Willingness to Accept

🔑 Key Concepts & Definitions

• Willingness to accept : the minimum price at which a firm is willing to produce a good or service

★ Must-know

📌 Ceteris paribus, when the price of a product increases, the quantity supplied increases, so the supply curve is upward-sloping.

📌 An individual firm’s supply is the profit-maximizing quantity produced by one firm, whereas market supply is the sum of the individual supplies of all firms.

Further detail

• In the short run, firms cannot adjust all their production capacities, so the supply curve is generally upward-sloping.

💡 Memory Hook

Higher price → higher profit → greater supply.

📖 3. Supply Shifts and Determinants

★ Must-know

📐 Formula — The inverse supply function is $P=c+dQ$, with $c>0$ and $d>0$.

📌 An increase in production-factor costs lowers profit and shifts the supply curve to the left, whereas a decrease in production-factor costs raises profit and shifts it to the right.

Further detail

📌 Technological progress allows producers to use fewer inputs for the same product, lowers production costs, and shifts the supply curve to the right.

• If refiners anticipate a higher summer gasoline price, they store part of today’s production, reducing current quantity supplied and shifting current supply to the left.

💡 Memory Hook

Higher input costs → lower profit → leftward supply shift.

📖 4. Market Equilibrium

🔑 Key Concepts & Definitions

• Market equilibrium : the price at which the quantity supplied and quantity demanded are exactly equal, so there is neither a shortage nor a surplus

★ Must-know

• The equilibrium is represented by the pair of equilibrium quantity Qeq and equilibrium price Peq.

Further detail

📌 Partial equilibrium concerns the market for one product, whereas general equilibrium concerns all markets and is not covered in this course.

💡 Memory Hook

Equilibrium means quantity demanded equals quantity supplied; shortage and surplus do not.

📖 5. Market Shocks and Surplus

🔑 Key Concepts & Definitions

• Consumer surplus : the benefit from exchange obtained by consumers whose willingness to pay is higher than the equilibrium price
• Producer surplus : the benefit from exchange obtained by producers whose willingness to accept is lower than the equilibrium price

★ Must-know

• A rightward demand shift raises both the equilibrium price and quantity, whereas a leftward demand shift lowers both, all else equal.

• When a positive demand shock and a negative supply shock occur together, the equilibrium price increases, while the effect on equilibrium quantity is indeterminate unless the relative magnitudes of the shocks are known.

• If the demand shock is larger, equilibrium quantity rises; if the supply shock is larger, equilibrium quantity falls; if the shocks have equal magnitude, the quantity effect cannot be determined from the stated information.

Further detail

📐 Formula — Total surplus satisfies $ST=SC+SP$, where SC is consumer surplus and SP is producer surplus.

• In the beer-market example, a heatwave creates a positive demand shock while drought raises the cost of an input and creates a negative supply shock.

💡 Memory Hook

Demand or supply shock → curve shift → new equilibrium price and quantity.

📖 6. Price Regulation

🔑 Key Concepts & Definitions

• Price ceiling : the maximum price that a producer may legally charge for a product
• Price floor : a minimum price below which a product may not legally be sold

📝 Essential Points

📌 A price ceiling above the equilibrium price is non-binding and has no effect because the market remains at Peq with quantity demanded equal to quantity supplied.

📌 A price ceiling below the equilibrium price is binding, changes the quantities demanded and supplied, and creates market disequilibrium.

💡 Memory Hook

A ceiling limits the maximum price; a floor limits the minimum price.

📊 Synthesis Tables

Demand and Supply Shifts

Shift	Equilibrium price	Equilibrium quantity
Demand right	Increases	Increases
Demand left	Decreases	Decreases
Supply right	Decreases	Increases
Supply left	Increases	Decreases