Supply And Demand

• each consumer makes individual choices

• aggregation of all consumers creates the demand

• consumer faces value maximization problem

• each company makes individual choices

• aggregation of all companies creates the supply

• company faces profit maximization problem

Supply and Demand require Competition! There cannot be Supply and Demand in a Monopoly.

Supply

• variable
  • price of the good
• constants (can change over time)
  • technology → Feral Futures, Disruptive Technologies
  • prices of inputs
  • taxes

Demand

• variable
  • price of the good
• constants (can change over time)
  • preferences → Customer Perspective
  • income → Poverty, Prahalad
  • prices of other goods

Equilibrium

• intersection of supply and demand function
• Game Theory → no need to act by either consumer or producer
• 

Excess Demand

• consumers demand more than suppliers are willing to supply
• price will increase, supply will increase, demand will decrease
• reaching equilibrium eventually → convergence

Excess Supply

• consumers demand less than suppliers are willing to supply
• price will decrease, supply will decrease, demand will increase
• reaching equilibrium eventually → convergence

Market Mechanism

• there is only too little supply or too little demand
• 

Shift Equilibrium

• change of supply inversely affects price
• change of demand directly affects price

Price Elasticity

• Marginal Changes
• Elasticity
• Cross-Elasticity
  • price elasticity of demand ⇐ 0
  • price elasticity of supply >= 0
• “arc elasticity” … taking the average slope along a price range
• used for analyzing the sensitivity of different variables $E_p=(\%\Delta q)/(\%\Delta p)=\frac{\Delta q}{\Delta p}\ast \frac{p}{q}$