• Unit 2: Supply and Demand

    In this unit, we introduce the demand and supply model and the resulting market equilibrium for price and quantity. We will explore how markets are constantly affected by changes that affect prices and quantities. If the market is unaffected by failures or government intervention, we will see that prices and quantities tend to move toward the equilibrium benchmark.

    "During the last decades, several challenges have significantly affected the egg industry, such as the increasing consumer demand for animal welfare, the need for more sustainable food production, and the growing human health and food security issues related to egg consumption."
    (Agnese Rondoni et al., Trends in Food Science & Technology, 2020)

    When you finish this unit, you will be able to analyze how these changes affect the prices of eggs and the quantity of eggs available in the market.

    Completing this unit should take you approximately 5 hours.

    • 2.1: Introduction to Demand and Supply

      Let's say you buy a shirt for $45. To make this transaction possible, you made a decision that you were willing to pay $45 or more for that shirt. Concurrently, the seller had to decide they would not sell the shirt for less than $45. How did your interests align with those of the seller in this scenario?

    • 2.2: Demand for Goods and Services

      Here, we focus on isolating the demand for goods and services. Our objective is to establish a law that explains demand behavior. We emphasize the distinction between the quantity demanded (a variable) and the demand (a function that shows the collection of price-quantity demanded combinations) to better understand the key factors influencing demand.

    • 2.3: Supply of Goods and Services

      In life, we often spend more time consuming (demanding) goods and services than producing (supplying) them. Perhaps that is why students tend to find analyzing supply more complex. In this section, we examine the law of supply, which explains why producers supply more units as the price of a product rises. We differentiate between quantity supplied (a variable) and supply (a function) and explore the factors that shift the supply curve, just as we did with demand in the previous section. Remember, we are examining supply in isolation from demand. In section 2.4, we will bring them together and analyze their interaction.

    • 2.4: Market Equilibrium and Demand and Supply Changes

      Now, you should be ready to place demand and supply together in the same analytical framework to analyze the entire market. As we move into the core concepts of microeconomics, remember to practice with the concepts and relations that you just learned.

      Recall the question at the beginning of this unit. How do your interests, as a consumer, align with those of a seller when seeking to purchase a specific good or service?

      In this section, we combine the relation between demand and supply into the demand and supply framework (model). The demand and supply model enables us to answer the following complex questions:

      • Why did the price of aluminum cans rise during the COVID-19 pandemic?
      • Why did the price of eggs sharply increase in January of 2023 in the U.S.?
      • Why did Blockbuster file for bankruptcy in 2010 and close most of its stores?
      • What do you expect to happen to the price of electric cars in the near future?
    • 2.5: Application of Market Equilibrium to the Analysis of the Labor Market and the Financial Markets

      In Unit 1, we discussed how economics intimidates some students because it uses mathematics, complex language, and abstract concepts. And yet, you are already equipped to tackle this complex question. In recent years, the world demand curve for copper shifted rightward due to continued economic growth in China and other emerging economies. Also, the costs of extracting the copper increased due to higher energy prices. What is the result?'

      We can use the simple demand and supply framework we developed in the previous sections to analyze almost any market. Most of us are especially interested in the labor market. In the circular flow model, we observed that we can consider labor as an input for producing goods and services.

      Labor, as an input, is owned by consumers (households). Consider this: only you can make the decision regarding whether you want to work or not (supply your labor). In this sense, workers establish the supply of labor (hours of work) while firms determine the demand for labor. So, what appears on the vertical axis of our labor market graph where we place prices? Yes, wages!

    • Unit 2 Assessment

      • Receive a grade