Sunday, October 2, 2016
Chapter 4: The Market Forces of Supply and Demand
• Supply and demand are the two words that economists use most often.
• Supply and demand are the forces that make market economies work.
• They determine the quantity of each good produced and the price at which
it is sold.
• If you want to know how any event or policy will affect the economy, you
must think first about how it will affect supply and demand.
Markets and Competition
• The terms supply and demand refer to the behaviour of people as they
interact with one another in competitive markets.
Before discussing how buyers and sellers behave, let’s first consider more fully
what we mean by a market and competition.
Market: a group of buyers and sellers of a particular good or service
Competitive market: a market in which there are many buyers and many sellers
so that each has a negligible impact on the market price
We begin our study of markets by examining the behaviour of buyers (consumer
Quantity demanded: the amount of a good that buyers are willing and able to
Law of demand: the claim that, other things equal, the quantity demanded of a
good falls when the price of the good rises
Demand schedule: a table that
shows the relationship
between the price of a
good and the quantity
Demand curve: a graph of the
relationship between the
price of a good and the
1 Sunday, October 2, 2016
Market Demand vs Individual Demand
Market demand: the sum of all the individual demands for a particular good or
Market Demand = all the consumers added up
Shifts in the Demand Curve
• Any change that rises the quantities that purchasers wish to purchase at a
given price shifts the demand curve to the right and vice versa.
Factors that shift the demand curve:
Normal good: a good for which, other things equal, an increase in
income leads to an increase in demand
Inferior good: a good for which, other things equal, an increase in
income leads to a decrease in demand
•Prices of related goods:
Substitutes: two goods for which an increase in the price of
one leads to an increase in the demand for the other
Complements: two goods for which an increase in the pri