Microeconomics: Demand, Supply, and Market Equilibrium
Welcome to the core concepts of microeconomics! Understanding demand, supply, and how they interact to determine market equilibrium is fundamental for financial analysis, especially in the context of the CFA program. This module will equip you with the tools to analyze how prices and quantities are set in various markets.
Understanding Demand
Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period. The relationship between price and quantity demanded is typically inverse, a principle known as the Law of Demand.
Consumer income, tastes and preferences, prices of related goods (substitutes and complements), consumer expectations, and the number of buyers in the market.
Understanding Supply
Supply represents the quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period. The relationship between price and quantity supplied is typically direct, known as the Law of Supply.
Input prices, technology, producer expectations, number of sellers, and government policies (taxes and subsidies).
Market Equilibrium
Market equilibrium occurs at the price where the quantity demanded by consumers equals the quantity supplied by producers. This intersection point determines the equilibrium price and equilibrium quantity.
The equilibrium price is the price at which the demand curve and the supply curve intersect. At this price, the quantity consumers want to buy is exactly equal to the quantity producers want to sell. If the price is above equilibrium, there will be a surplus (quantity supplied > quantity demanded), pushing prices down. If the price is below equilibrium, there will be a shortage (quantity demanded > quantity supplied), pushing prices up. The market naturally tends to move towards this equilibrium point.
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When market conditions change (e.g., a shift in demand or supply), the equilibrium price and quantity will adjust. Understanding these shifts is crucial for forecasting price movements and market outcomes.
| Condition | Impact on Equilibrium Price | Impact on Equilibrium Quantity |
|---|---|---|
| Increase in Demand | Increases | Increases |
| Decrease in Demand | Decreases | Decreases |
| Increase in Supply | Decreases | Increases |
| Decrease in Supply | Increases | Decreases |
Price Elasticity of Demand and Supply
While demand and supply determine the equilibrium, price elasticity measures the responsiveness of quantity demanded or supplied to a change in price. This concept is vital for understanding the magnitude of price changes and their impact on revenue.
For financial analysts, understanding elasticity is key to forecasting sales volumes, pricing strategies, and the impact of economic shocks on different industries.
Learning Resources
Official curriculum overview from the CFA Institute, providing context and structure for economics topics within the program.
A comprehensive series of videos and practice exercises explaining the fundamental concepts of supply, demand, and market equilibrium.
An accessible explanation of the law of supply and demand, including its importance in market economics and how it influences prices.
Detailed explanation of price elasticity of demand, including its calculation, determinants, and implications for businesses.
An engaging and visually driven video that breaks down the core principles of supply and demand in an easy-to-understand manner.
Full course materials, including lectures and problem sets, from MIT's introductory microeconomics course, offering in-depth academic content.
A broad overview of the economic model of supply and demand, covering its history, applications, and related concepts.
A concise explanation from The Economist on price elasticity, highlighting its relevance in real-world economic scenarios.
While not a single direct link, searching Paul Krugman's blog for 'demand and supply' will yield insightful articles and discussions on these fundamental microeconomic principles.
A sample or update document related to the CFA Program curriculum, which often includes sections on economics and financial reporting, providing a glimpse into the depth of study.