Microeconomics Unit 3 Demand and Supply Notes 2025 (2)

Microeconomics Unit 3 Demand and Supply Notes 2025 (2)

Microeconomics Unit 3 focuses on demand and supply principles, exploring individual and market demand, movements along demand curves, and shifts in demand. Key topics include the law of demand, market equilibrium, consumer and producer surplus, and government intervention strategies. This resource is ideal for students studying microeconomics at the undergraduate level, providing clear explanations and examples. It also covers the effects of price changes on demand and supply, along with graphical illustrations for better understanding.

Key Points

  • Explains individual demand factors including price, income, and preferences.
  • Covers market demand and the aggregation of individual demands.
  • Illustrates the law of demand with schedules and graphs.
  • Discusses shifts in demand due to changes in related goods and consumer income.
, , ,
  • 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 (2)

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 demand schedules and graphs, showing how different prices correspond to varying quantities demanded. For example, a demand schedule for spaghetti shows that at lower prices, consumers are willing to purchase more, while higher prices lead to decreased demand.
How do shifts in demand affect market equilibrium?
Shifts in demand can significantly impact market equilibrium by changing the equilibrium price and quantity. For instance, an increase in demand shifts the demand curve to the right, leading to a higher equilibrium price and quantity. Conversely, a decrease in demand shifts the curve to the left, resulting in lower equilibrium price and quantity. Understanding these shifts is crucial for analyzing market dynamics.
What factors can cause a shift in the supply curve?
Several factors can cause a shift in the supply curve, including changes in production costs, technology advancements, and government policies such as taxes or subsidies. For example, if the cost of raw materials decreases, producers can supply more at each price level, shifting the supply curve to the right. Conversely, an increase in production costs would shift the supply curve to the left, indicating a decrease in supply.
What is consumer surplus and how is it calculated?
Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It represents the benefit to consumers from purchasing a product at a lower market price. For example, if a consumer is willing to pay R8 per kilogram of tomatoes but the market price is R5, the consumer surplus for that transaction would be R3 per kilogram. This surplus can be visualized on a demand curve graph.
How does government intervention affect supply and demand?
Government intervention can alter supply and demand through mechanisms like price ceilings and floors. For example, setting a maximum price below equilibrium can create excess demand, leading to shortages. Alternatively, a minimum price above equilibrium can result in excess supply, where producers cannot sell all their goods. These interventions can lead to deadweight loss, where potential gains from trade are lost.

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