Supply and Demand

A market works only where property rights 产权 are well defined – owners can use, exclude others from, and trade their resources; without them, prices cannot coordinate exchange. Within that framework, the two forces are demand and supply.

Demand 需求 is the relationship between the price of a good and the quantity buyers are willing and able to buy. The law of demand 需求定律 says price and quantity demanded move in opposite directions, so the demand curve slopes downward. Two reasons: the substitution effect 替代效应 (when a good gets pricier, buyers switch to alternatives) and the income effect 收入效应 (a higher price shrinks real purchasing power).

The demand curve slopes down; income, tastes, and related prices shift it

Distinguish a change in quantity demanded (a move along the curve, caused only by the good's own price) from a change in demand (a shift of the whole curve). Demand shifts with the determinants 决定因素, remembered as TRIBE:

• Tastes/preferences,
• Related goods – a rise in the price of a substitute 替代品 raises demand; a rise in the price of a complement 互补品 lowers it,
• Income – for a normal good 正常商品 more income raises demand; for an inferior good 低档商品 it lowers it,
• Buyers (number of consumers),
• Expectations of future price or income.

The market demand curve is the horizontal summation 水平相加 of every individual buyer's demand curve – at each price, add up the quantities all buyers want. That is why more buyers (the B above) shifts the whole market curve to the right.

Supply 供给 is the relationship between price and the quantity sellers will offer. The law of supply 供给定律: price and quantity supplied move in the same direction, so the supply curve slopes upward (higher prices cover higher marginal costs and reward more output).

The supply curve slopes up; costs, technology, tax, and subsidy shift it

Again separate a change in quantity supplied (movement along the curve, from the good's own price) from a change in supply (a shift). Supply shifts with input prices, technology, taxes and subsidies 补贴, prices of other goods a firm could make, number of sellers, and expectations. Just like demand, the market supply curve is the horizontal sum of individual firms' supply curves – add the quantities all firms offer at each price – so more sellers shifts market supply to the right.

Exam skill: on the free-response section you must draw correctly labeled supply-and-demand graphs and shift the right curve in the right direction – decide first whether the event changes an "own price" (move along) or a determinant (shift).

Price elasticity of demand 需求价格弹性 measures how responsive quantity demanded is to a price change:

Inelastic versus elastic demand: a small versus large response to a price change

• $E_d>1$: elastic 富有弹性 (quantity responds strongly);
• $E_d<1$: inelastic 缺乏弹性 (quantity barely responds);
• $E_d=1$: unit elastic.

Demand is more elastic when there are more substitutes, the good is a luxury, it takes a large share of income, or buyers have more time to adjust. Elasticity links to total revenue 总收入 ($P\times Q$): if demand is elastic, a price cut raises revenue; if inelastic, a price cut lowers it. Along a straight-line demand curve, elasticity falls as you move down (elastic on top, inelastic at the bottom).

Worked example. A price rise from $\$10$ to $\$12$ (a $+20\%$ change) cuts quantity demanded from $100$ to $85$ (a $-15\%$ change). Then $E_d=\left|\dfrac{-15\%}{20\%}\right|=0.75<1$, so demand is inelastic. Because it is inelastic, the price rise raises total revenue: from $\$10\times100=\$1000$ to $\$12\times85=\$1020$.

Price elasticity of supply 供给价格弹性, $E_s=\dfrac{\%\ \Delta\ Q_s}{\%\ \Delta\ P}$, measures how responsive sellers are. Supply is more elastic when firms can adjust output easily – spare capacity, storable goods, and above all more time (supply is more elastic in the long run than the short run).

The same price rise gives a small supply response when PES is below 1, a large one above 1

• Cross-price elasticity 交叉价格弹性 $=\dfrac{\%\ \Delta\ Q_x}{\%\ \Delta\ P_y}$: positive for substitutes, negative for complements – the sign tells you the relationship.
• Income elasticity 收入弹性 $=\dfrac{\%\ \Delta\ Q}{\%\ \Delta\ \text{income}}$: positive for normal goods (and $>1$ for luxuries), negative for inferior goods.

Worked example. When the price of coffee rises $10\%$, the quantity of tea demanded rises $6\%$: cross-price elasticity $=\dfrac{+6\%}{+10\%}=+0.6$. The positive sign confirms coffee and tea are substitutes. If instead a $5\%$ rise in incomes raised restaurant-meal demand $10\%$, income elasticity $=\dfrac{10\%}{5\%}=+2$ – a normal good, and a luxury since it exceeds $1$.

Cross elasticity: positive for substitutes, negative for complements

Exam skill: you are expected to compute an elasticity, classify it, and read a sign as evidence of substitute/complement or normal/inferior.

Equilibrium 均衡 is where supply meets demand: the equilibrium price clears the market, so quantity demanded equals quantity supplied and there is no shortage or surplus.

Consumer surplus and producer surplus at the market equilibrium

• Consumer surplus 消费者剩余 is the area below the demand curve and above the price – the gap between what buyers would pay and what they do pay.
• Producer surplus 生产者剩余 is the area above the supply curve and below the price – the gap between the price and sellers' minimum acceptable price.
• Their sum is total surplus 总剩余, and the competitive equilibrium maximizes it – this is why free markets are called allocatively efficient 配置有效率.

A real market: many buyers and sellers meet, and price settles where the quantity wanted equals the quantity offered

Away from equilibrium the market self-corrects: above the equilibrium price there is a surplus 过剩 (excess supply) that pushes price down; below it a shortage 短缺 (excess demand) that pushes price up.

Above equilibrium there is excess supply; below it, excess demand

When a determinant shifts a curve, the equilibrium moves predictably. A single shift gives a definite result for both price and quantity. When both curves shift, one of price or quantity is indeterminate (depends on the relative sizes of the shifts) – a favorite exam trap. Work these out by drawing the shifts.

Governments intervene, usually reducing total surplus:

A price ceiling causes a shortage; a price floor causes a surplus

• A price ceiling 价格上限 (a legal maximum, like rent control) below equilibrium causes a persistent shortage.
• A price floor 价格下限 (a legal minimum, like a minimum wage) above equilibrium causes a persistent surplus.
• An excise tax 消费税 shifts supply up by the tax; the burden (tax incidence 税收归宿) falls more heavily on whichever side is more inelastic.
• A subsidy shifts supply down, raising quantity.

Each of these creates deadweight loss 无谓损失 – mutually beneficial trades that no longer happen, shown as a triangle between the curves at the new quantity.

Exam skill: on a graph, be able to shade consumer surplus, producer surplus, government revenue from a tax, and deadweight loss, and say who bears the tax and why.

When a country opens to trade at a world price 世界价格:

A tariff raises domestic supply, cuts demand, and shrinks imports

• If the world price is below the domestic price, the country imports 进口 – consumers gain more than producers lose, so total surplus rises.
• If the world price is above the domestic price, the country exports 出口 – producers gain more than consumers lose.

A tariff 关税 (a tax on imports) or a quota 配额 (a limit on imports) raises the domestic price, helps domestic producers, hurts consumers more, and creates deadweight loss. Free trade maximizes total surplus, which is the core efficiency argument for it.

• Separate a movement along a curve (own price) from a shift (a determinant); a single shift gives a definite result, a double shift leaves one variable indeterminate.
• Compute elasticity $E_d=|\%\Delta Q \div \%\Delta P|$; elastic ($>1$) means a price cut raises total revenue, inelastic ($<1$) lowers it.
• Read the sign of cross-price elasticity (substitutes $+$, complements $-$) and income elasticity (normal $+$, inferior $-$).
• Shade consumer/producer surplus and the deadweight loss from a tax or price control; incidence falls on the more inelastic side.
• A price ceiling below equilibrium causes a shortage; a price floor above causes a surplus.