Chapter 2 Market forces: Demand and Supply
Market demand curve
A curve indicating the total quantity of a good all consumers are willing
and able to purchase at each possible price, holding the prices of related
goods, income, advertising, and other variables constant.
Variables other than the price of a good that influence demand are known
as demand shifters.
For a demand curve, the movement along the demand curve is called
change in quantity demanded.
Whenever advertising, income, or the price of related goods changes, it
leads to a change in demand; the position of the entire demand curve
shifts. A rightward shift in demand curve is called an increase in demand,
since more of the good is demanded at each price. A leftward shift in the
demand curve is called a decrease in demand.
Whether an increase in income shifts the demand curve to the right or to
the left depends on the nature of consumer consumption patterns.
Accordingly, economists distinguish between two types of good: normal and
A good whose demand increases when consumer incomes rise is called a
Changes in income tend to have profound effects on the demand for
durable goods, and these effects are typically amplified in developing
countries and rural areas.
Inferior good is a case of a increase in income reduces the demand for a
good. Example like Bologna, bus travel, and “generic” jeans are inferior
Price of related goods
www.notesolution.com Substitutes: Goods for which an increase (decrease) in the price of one
good leads to an increase (decrease) in the demand for the other good. Like
Coke and Pepsi. Substitutes need not serve the same function; for
example, automobiles and housing could be substitutes.
Complements: Goods for which an increase (decrease) in the price of one
good leads to decrease (increase) in the demand of the other good.
Advertising and consumer tastes
Advertising often provides consumers with information about the
existence or quality of a product, which in turn induces more
consumers to buy the product. These types of advertising message are
known as informative advertising.
Advertising can also influence demand by altering the underlying
tastes of consumers. For example, advertising that promotes the latest
fad in clothing may increase the demand for a specific fashion item by
making consumers perceive it as “the” thing to buy. These types of
advertising message are known as persuasive advertising.
The demand for a product is also influenced by changes in the size and
composition of the population. Generally, as the population rises, more
and more individuals wish to buy a given product.
If consumers expect future prices to be higher, they will substitute
current purchase for future purchases. This behavior is called
stockpiling and generally occurs when products are durable in nature.
The current demand for a perishable product such as bananas
generally is not affected by expectations of higher future prices.
Health scare-cigarette; baby birth-diapers
The demand function
www.notesolution.com Demand function: a function that describes the how much of a good will be
purchased at alternative prices of that good and related goods, alternative
income levels, and alternative values of other variables affecting demand.
Linear demand function:
It is a representation of the demand function in which the demand for a
given good is a linear function of prices, income levels, and other variables
It is the value consumers get from a good but do not have to pay for. More
generally, consumer surplus is the area above the price paid for a good but
below the demand curve. The problem 2-2 is a good example in illustrating
Market supply curve
A curve indicating the total quantity of a good that all producers in a
competitive market would produce at each price, holding input prices,
technology, and other variables affecting supply constant.
Changes in the price of a good lead to a change in quantity supplied of
that good. This corresponds to a movement along a given supply curve.
Variables that affect the position of the supply curve are called supply
shifters, and they include the prices of inputs, the level of technology, the
number of firms in the market, taxes, and producer expectations; changes
in these variables will make supply curve shift, and these shifts are called