Supply and Demand

#economics #microeconomics #supply #demand

In this section, we will discuss supply and demand.

Notations

We will be discussing the two aspects of both supply and demand, the values and the functions.

Price: $P$
Demand function: $D$
Quantity of demand, i.e., the value of the demand function for a certain set of variables: $Q_d$
Supply function: $S$
Quantity of supply: $Q_s$
Quantity of demand or supply: $Q$

Some auxiliary variables:

Income of the community: $I_c$

The supply function and demand function are functions of many variables, i.e., $Q({h_i})$. The set of variables ${h_i}$ are factors that can have effects on the quantity of demand and quantity of supply. One of the most discussed variables is price $P$, i.e., quantity is a function of price $Q(P)$.

A Conservation Law?

However, it makes more sense to think of a conservation law $df(P, Q_s, Q_d) = 0$ as we have constraints on the money that can be spent as well as materials to produce the goods.

However, it won’t be easy to find the exact form of this conservation law.

Demand

The demand function specifies the relation between price $P$ and the quantity of demand $Q_d$. Though the relation is between the two values, the relation itself is determined by many different factors such as the average income of the community $I_c$. Thus changes in these factors, such as increase in the income, will change the relation between the prices and quantity of demand.

Increase in the income shifts the relation to the right

The demand function as a function of many variables is properly defined by a function of these variables. In the above example, the demand function is a function of price $P$ and the income of the community $I_c$.

For simplicity, we only discuss the relation between price $P$ and the quantity of demand $Q_d$. All the changes in the relations due to other variables will be obscured.

Supply

Similar to demand, the supply function is also represented by the relation between the price $P$ and the quantity of supply $Q_s$. The dependencies on other variables will be viewed as shifts in the relation between $P$ and $Q_s$.

Supply and Demand Analysis

The supply and demand analysis is a useful tool to think about the price changes.

Demand function shifts right, price becomes higher.

Planted: 2020-11-08 by Lei Ma;