Chapter 3 Demand, Supply, and Price.
3.1 Demand- Quantity Demanded.
- The Total amount that consumers desire to purchase in some time period is called the quantity demanded
of a product.
- Quantity bought (or exchanged) refers to actual purchases.
- Quantity demanded is a flow, as opposed to a stock.
Extensions in Theory 3-1. The Distinction between stocks and flows
Quantity Demanded and Price
- A basic hypothesis is that – ceteris paribus- the price of a product and the quantity demanded are
negatively related. When the price of a product increases, its quantity demanded decreases- the law
- Why? These are usually several products that can satisfy any given want or desire.
- A reduction in the price of a product means that the specific desire can now be satisfied more cheaply
by buying more of that product.
- Similarly, when price of a product increases, consumers switch to other relatively cheaper products.
Demand Schedules and Demand Curves
- When the price of carrots decreases from $100 to $80, quantity demanded increase from 40 to 50-
there is a movement along the curve.
- A change in variables other than price will shift the demand curve to a new position.
- consumers’ income
- prices of other products
- expectations about the future price or income
Normal good: when your income increase, desire to purchase also increase
Inferior good: When your income increases, desire to purchase decreases (EX: bus ride, cheap wine)
Determinant of Demand: Income
- As income increases the demand for a normal good increases but for inferior goods decreases.
- In Japan, Ashahi Brewery did well during recession. What is the possible implication of this?
- In 2008, Melbourne newspaper reported that local book retailers were faring better this
Christmas than the last. Implication? Possibly good are inferior goods
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Determinant of Demand: Prices of Related Goods.
- When the fall in price of one good reduces the demand for another good (Shift of demand curve to
the left), the two goods are substitutes.
- Examples? In the reverse case they are complements.
- A rightward shift indicates an increase in demand.
- A leftward shift indicates a decrease in demand.
- A change in demand is a change in quantity demanded at every price - - a shift of the entire curve
- A change in quantity demanded refers to a movement from one point on a demand curve to
another point, either on the same demand curve or on a new one (but at different level of price).
Page 2 of 6 3,2 Supply
- Quantity supplied
- quantity supplied is the amount that firms are willing to offer for sale at any given price. It is not
necessarily the quantity actually sold
- Ceteris Paribusm the price of a product and the quantity supplied are positively related- the law
- Why? If the price of a particular product rises, then the production and sale of this product is
- Supply curves also reflect the minimum price firms are willing to accept to supply that particular
unit of product.
- Supply schedule and supply curves
- A change in any variable other than price will shift the supply curve to a new position. The
following variables will shift the supply curve.
o Prices of inputs
o Government taxes or subsidies
o Prices of other related products
o Number of suppliers
- A change in supply is a change in the quantity that will be supplied at every price – a shift of the entire
- Whereas a change in quantity supplied refers to a movement from one point on a supply curve to