DEMAND AND SUPPLY
This lecture examines the basic Demand/Supply model that is central to microeconomics.
We do so by defining the relationship between Price and Quantity in Demand and Supply
without analyzing the cause of those relationships. We analyze the cause of the relationships
later in the course. We begin with a definition of Microeconomics and Partial Equilibrium
Analysis before explaining the importance of Demand/Supply for markets.
Definition: Microeconomics is the study of individual units in an economy (households,
firms, markets, etc.) and their relationships. This entails the study of the allocation of resources
and the distribution of income.
Modern economics relies heavily on two methodological tools: partial equilibrium analysis
Definition: Equilibrium is a state of rest with no tendency to change given existing forces
Definition: Partial Equilibrium Analysis is the analysis of the relationship between two
variables while holding other relevant variables constant (ceteris paribus = other things equal),
then examining the effect of the other variables by systematically examining their variation.
Example At what temperature does water boil? Most people would answer 100 C but in
fact this is only true holding at least two other variables constant: atmospheric pressure (sea
level) and purity of the water (not salty, for example). Scientists use partial equilibrium analysis
all the time to isolate relationships before they analyze the variations caused by changes in other
Definition: General Equilibrium Analysis is the analysis of the relationship between all
variables simultaneously. (We won’t use this approach in this class)