Fraser International College
ECON1034 “Principles of Microeconomics”
Chapter 3: Demand and Supply
The KEY concepts of the chapter are:
- Demand (definition, demand schedule, demand curve)
- Supply (definition, demand schedule, demand curve)
- Factors that shift demand and supply
- Market equilibrium (what it shows, what it means, be able to find equilibrium price
- Factors that change market equilibrium
Recall the definition of economics from Chapter 1:
Economics is a social science in which we study how people make choices and respond to
incentives in presence of scarcity.
One incentive that people respond to is a price of a good.
How are prices determined? – By markets – in other words, by demand and supply.
Recall the concept of opportunity cost from Chapter 1:
Opportunity cost refers to the best alternative forgone.
Economists think of prices as opportunity costs:
The money price is
A relative price is
1 Demand can be described as Quantity of good or service consumers are willing to buy at
a given price and time period.
If you demand a good, then you
2.Can afford it and
3.Plan to buy it .
The quantity demanded of a good or service is the amount that consumers plan to buy during a
given time period at a particular price.
The quantity demanded is measured as per unit of time.
Many factors influence how much of a good people are planning to buy, and one of these
factors is price.
We want to look at how the quantity demanded depends in a price of a good, keeping all
other factors unchanged.
The law of demand describes a relationship between a price of a good and a quantity demanded
of a good:
PRICE Increases PRICE decreases
Qty Demand Decreases Qty Demand increases
Why do people demand a lower quantity demanded when price is higher?
1. Because of substitution effect
As when the price of the good increases the person will find better substitute and
transfer to it and buy less of it .
2. Because of income effect
As when the price of good increases , the person have limited income to buy goods
and services thus he will buy less of that product in order to maintain its expenditure.
2 Substitution effect:
This can be described as when the price of good increases the people shift to the good which has
This can be described as when the income increases the person will buy more of the good and
when income decreases it will buy less of the product.
When income increases people will buy less of inferior goods and shift to luxury such as when
the income of person increases he might prefer to travel by Cab instead of bus.
Price (dollars per unit) Quantity demanded
A 0.50 22
B 1 15
C 1.5 10
D 2 7
E 2.5 3
A graph of a demand curve:
3 Another interpretation of a demand curve is that it shows willingness and the ability to
Recall the discussion of the marginal benefit from Chapter 2:
If a small quantity is available, people will be willing to pay more for one more unit than if a
large quantity is available. As the quantity available increases, the marginal benefit of each
additional unit falls and so does the highest price that some one is willing to pay.
A change in demand
When any factor that affects buying plans other than price of the good changes, there is a
change in demand.
A change in demand means a shift of the demand curve:
If demand increases, the curve shifts to Right
If demand decreases, the curve shifts to Left
When demand increases, the curve shifts to the right and quantity demanded at each price
The factors that change demand:
1. Prices of related goods(Substitute and Compliment)
2. Expected future prices
3. Income and taste and preferences.
4. Expected future income and credit and Price of product.
7. Tax, Fashion Weather .
4 Prices of related goods:
Goods can be related as
- Substitutes, or
A substitute is a good that is the best alternative available such as Tea and Coffee.
• If the price of a substitute falls, the quantity demand of good will decrease.
If the price of a substitute rise, the quantity demand of good will increase.
A complement is a good which is jointly demanded such as DVD and DVD Player.
If a price of a complement increases, the quantity demand will fall.
If a price of a complement decreases, the quantity demand will rise.
Expected future Income:
When it is expected that the future income will increase the quantity demand of the good will
increase and when it is expected that the future income will decrease the quantity demand will
Expected future Prices :
When it is expected that in the future prices will increase the quantity demand of the good will
increase and when it is expected that the future prices will decrease the quantity demand will also
We need to distinguish between
- Normal goods are the goods whose demand increase