Lecture Four: Demand and Supply
September 22, 2011
Markets and Prices
Market - any arrangement that enables buyers and sellers to get information and
so business with each other.
Competitive Market - a market that has many buyers and many sellers so no
single buyer or seller can influence the price.
The Money Price - the amount of money needed to buy the good.
Relative Price - the ration of it money price to the money price of the next best
alternative good (aka its opportunity cost)
If you demand something then you
1. want it
2. can afford it
3. have made a definite plan to buy it
Wants - the unlimited desires of wishes people have for goods and services.
Demand reflects a decision about which wants to satisfy.
Quantity demanded - the amount that consumers plan to buy during a particular
time period and at a particular price of a certain good or service.
The Law of Demand
Other things remaining the same, the higher the price of a good, the smaller is
the quantity demanded, and the lower the price of the good, the larger is the
The law of demand results from
- Substitution effect
- Income effect
Substitution Effect When the relative price (opportunity costs) of a good or service rises, people
seek substitutes for it, so the quantity of the good or service decreases.
When the price of a good or service rises relative to income, people cannot afford
all the thing they previously bough, so the quantity demanded of the good or
Demand Curve and Demand Schedule
The term demand refers to an entire relationship between the price of the good
and the quantity demanded of the good.
A Demand Curve shows the relationship between the quantity demanded of a
good and its price when all other influences of consumers planned purchases
remain the same
There is a demand curve for energy bars.
A rise in the price, other things remaining the same, brings a decrease in the
quantity demanded and a movement along the demand curve.
Willingness and Ability to Pay
A demand curve is also a willingness-and-ability-to-pay curve.
The smaller the quantity available, the higher is the price that someone is wiling
to pay for another unity.
Willingness to pay measures the marginal benefit.
A Change in Demand
When some influence on buying plans other than he price of the good changes,
there is a change in demand for that good.
The quantity of the good that people plan o buy changes at each and every price,
so there is a new demand curve. When demand increases, the curve shifts to the right. When demand decreases,
the curve shifts to the left.
Factors that Change Demand
The prices of related goods
Substitute - a good that can be used in place of another good
Complement - a good that is used in conjunction with another good
When the price of s substitute goes up, or the price of a complement falls, the
demand would increase.
When the price of a substitute drops, or the price of a complement increases, the
demand would decrease.
Expected future prices
If the price of a good is expected to rise in the future, current demand for the
good increases and the curve shifts rightward.
When income increases, consumers buy more of most goods and the demand
curve shifts rightward.
Normal good - demand increases and income increases
Neutral good - demand stays the same regardless of the increase in income
Inferior good - a good for which demand decreases and income increases
Expected future income and credit
When income is expected to increase in the future or when credit is easy to
obtain, the demand might increase now
The greater the population, the greater is the demand for all goo