Microeconomics Unit 3 Demand and Supply Notes 2025

Microeconomics Unit 3 Demand and Supply Notes 2025

Microeconomics Unit 3 focuses on the principles of demand and supply, exploring individual and market demand, movements along demand curves, and shifts in demand. The notes cover essential concepts such as market equilibrium, consumer and producer surplus, and government intervention in markets. Ideal for students studying microeconomics, this resource provides a comprehensive overview of key topics, including shifts in demand and supply curves, and the effects of price fixing. It serves as a valuable study guide for exams and coursework in economics.

Key Points

  • Explains the law of demand and how price affects quantity demanded.
  • Covers market equilibrium and the conditions for excess demand and supply.
  • Discusses consumer and producer surplus with graphical illustrations.
  • Details the impact of government intervention on market prices.
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  • Parshardo Pill
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Economics 1 2022
Unit for Applied Economics
Faculty of Business and Management Sciences
Microeconomics Unit 3
Demand and Supply
Contents
1 Demand 2
1.1 Individual Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Market Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2 Movements along a demand curve (a change in the quantity demanded) 5
2.1 A shift of the demand curve (a change in demand) . . . . . . . . . . . . . . . . . . 6
3 Supply 8
3.1 Individual Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Market Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Other Determiniants of Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4 Market Equilibrium 11
4.1 Excess Demand and Excess Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5 Consumer and Producer Surplus 14
6 Shifts in Demand and Supply Curves 17
6.1 Shifts in Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.2 Shifts in Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7 Simultaneous Shifts 19
7.1 Four Combinations of Shifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8 Government Intervention 25
8.1 Price Fixing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.2 Minimum Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1 Demand
1 Demand
Demand is the amount of goods/services that individuals, businesses and other role players in
the economy want to purchase and are able to purchase, within a certain given period.
1.1 Individual Demand
Lets assume Sera is a student who lives on residence. The following are factors that will
influence her decision regarding the quantity of spaghetti to purchase:
•
The price of the product
The lower the price of the spaghetti, the more spaghetti she will purchase, ceteris paribus.
•
The prices of related products
Complementary goods: Complementary goods work together well. For example tomato’s
and cheese complement spaghetti.
Substitute goods:
Substitutes are goods that can be used in place of the original good.
For example, rice could be a substitute product for spaghetti.
•
The income of the consumer
The higher Sera’s income, the more she will be able to purchase, and vice versa.
•
The tastes (or preferences) of the consumer
Sera has her own tastes. For example, due to the fact that she is trying to loose weight,
Sera will try to cut back on consuming a lot of spaghetti, as she was told it added to her
weight problem.
•
The size of the household
A larger household will demand more spaghetti than a smaller household. Therefore,
Sera will not have a high demand as she lives in residence alone.
To summarise the above points we can say: The quantity demanded by an individual in a par-
ticular period depends on (or is a function of) the price of the good; the price of related goods;
the income of the consumer; consumer tastes; and the number of people in the household.
This is not precluding other factors that may also influence demand.
The above summary can also be expressed by means of an equation:
If
Q
d
=
quantity of spaghetti demanded in a particular period
P
x
=
price of spaghetti
P
g
= price of related goods
Y =
household’s income during the period
T = taste of the consumer(s) concerned
N =
number of people in household concerned
. . . =
allowance for other possible influences
Then, we can express the individual’s demand for spaghetti as follows:
2
1 Demand
Q
d
= ƒ (P
x
, P
g
, Y, T, N, . . .)
However, in order to simplify the above equation and to focus on only the factors which have
the largest impact on demand, we will focus only on price and assume ceteris paribus for all
the remaining factors. Therefore, we can abbreviate the equation as follows:
Q
d
= ƒ (P
x
,
¯
P
g
,
¯
Y,
¯
T,
¯
N, . . .)
The bars above the P, Y, T and N indicate that those variables are held constant.This is not to
say that those variables are ignored, it is just to say that it is assumed that they do not change.
Due to the ceteris paribus assumption, we can further simplify the equation as follows:
Q
d
= ƒ (P
x
)
ceteris paribus
Due to the fact that price is considered the most important factor influencing demand, the
relationship between price and demand is called the law of demand.
The law of demand states that if the price of a product increases, the quantity de-
manded will decrease and vice versa, ceteris paribus (all other factors held con-
stant).
The law of demand can be illustrated by means of a demand schedule:
Possibility Price of spaghetti
(per kg)
Quantity demanded
(kg per month)
a 1 10
b 2 8
c 3 6
d 4 4
e 5 2
Table 1: Sera’s demand schedule for spaghetti
The law of demand can be illustrated graphically as in Figure 1.
The higher the price of spaghetti, the less quantity demanded. For example, at point e, the
price is R5 per kg and the quantity demanded is 2kgs. On the other hand, when price is low,
like at point a, the quantity demanded is high.
1.2 Market Demand
Businesses are interested in the total demand (or market demand) of goods/services and not
in individual demand.
Lets assume there are 3 individuals that demand spaghetti, namely; Sera, Lorelei and Mike.
Refer to the market demand schedule in Table 2:
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FAQs of Microeconomics Unit 3 Demand and Supply Notes 2025

What is the law of demand and how is it illustrated?
The law of demand states that as the price of a good decreases, the quantity demanded increases, and vice versa, assuming all other factors remain constant. This relationship is illustrated through a downward-sloping demand curve on a graph, where the price is plotted on the vertical axis and quantity demanded on the horizontal axis. For example, a demand schedule for spaghetti shows that at lower prices, consumers will demand larger quantities, demonstrating this inverse relationship.
How do shifts in demand and supply curves affect market equilibrium?
Shifts in demand and supply curves can significantly alter market equilibrium. An increase in demand shifts the demand curve to the right, leading to a higher equilibrium price and quantity. Conversely, an increase in supply shifts the supply curve to the right, resulting in a lower equilibrium price and a higher quantity. Understanding these shifts helps in predicting market behavior and the resulting changes in prices and quantities available in the market.
What are consumer and producer surplus, and why are they important?
Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay, representing the benefit to consumers. Producer surplus is the difference between the actual price producers receive and the minimum price they would accept. Both surpluses are crucial for understanding economic efficiency and welfare, as they indicate how well resources are allocated in the market and the overall benefits to society.
What role does government intervention play in microeconomics?
Government intervention can take the form of price ceilings and floors, which are regulations that set maximum or minimum prices for goods. For instance, a price ceiling below equilibrium can lead to excess demand, while a price floor above equilibrium can create excess supply. Understanding these interventions is key for analyzing their impact on market efficiency, consumer welfare, and producer incentives.

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