Markets and prices
A market is any arrangement in which buyers and sellers trade. Prices carry information: a high price tells buyers to economise and tells sellers to produce more. Microeconomics studies how these individual choices add up.
Demand
Quantity demanded is the amount buyers are willing and able to buy at a given price. The law of demand says that, other things equal, a higher price means a lower quantity demanded. The phrase "other things equal" (ceteris paribus) is essential: we change one factor at a time.
A change in the product's own price causes a movement along the demand curve. A change in anything else shifts the whole curve. The usual shifters of demand are:
- Income. For a normal good, higher income raises demand. For an inferior good (such as instant noodles for many households), higher income lowers it.
- Prices of related goods. A rise in the price of a substitute raises demand for this good; a rise in the price of a complement lowers it.
- Tastes and expectations. A fashion trend or an expected future price rise can shift demand.
- Number of buyers.
Supply
Quantity supplied is the amount sellers are willing and able to sell at a price. The law of supply: a higher price means a higher quantity supplied, because higher prices cover the rising cost of producing extra units. Supply shifters include input costs, technology, taxes and subsidies, expectations, and the number of sellers. Cheaper inputs or better technology shift supply to the right (an increase).
Worked example
A bakery sells 200 loaves a day at 4 dollars. Decide whether each event moves along or shifts a curve.
- The bakery lowers its loaf price to 3 dollars and sells 260. This is a movement along the demand curve, because the price of the good itself changed. Quantity demanded rose.
- A rival bakery raises its bread price. Customers switch toward our bakery at every price. Rival bread is a substitute, so demand shifts right.
- Flour becomes more expensive. Costs rise at every output level, so supply shifts left.
- A new oven lets the bakery bake faster with the same inputs. Supply shifts right.
A reliable test: if the price of the good itself moved, slide along the curve. If something else moved, shift the curve. Students most often lose marks by mixing up "change in demand" and "change in quantity demanded".