ECON1102 Chapter Notes - Chapter 3: Demand Curve, Consumer Sovereignty, Comparative Advantage
Chapter 3: Where Prices Come From: The Interaction of Demand and
Supply
The Demand Side of the Market:
Consumers ultimately determined which goods and services will be produced =
consumer sovereignty
Demand Schedules and Demand Curves
Demand Schedule: A table showing the relationship between the price of a product
and the quantity of the product demanded
Quantity Demanded: The amount of a good or service that a customer is willing and
able to purchase at a given price
Demand Curve: A curve that shows the relationship between the price of a product
and the quantity of the product demanded
Market Demand: The demand by all the consumer of a given good or service
Law of Demand: Holding everything else constant, when the price of a product falls
the quantity demanded will increase, and when the price of a product rises the
quantity demanded will decrease
Ceteris Paribus: The requirement that when analysing the relationship between two
variables such as price and quantity demanded – other variables must be held
constant
Substitution Effect: The change in the quantity demanded of a good or service that
results from a change in price, making the good or service more or less expensive
relative to other goods or services that are substitutes
Income Effect: The change in the quantity demanded of a good or service that results
from the effect of a change in price on consumer purchasing power
Variables that Shift Market Demand
- Income
- Prices of related goods
- Tastes
- Population and demographics
- Expected future prices
Normal Good: A good or service for which the demand increases as income rises
and decreases as income falls
Inferior Good: A good or service for which the demand increases as income falls and
decreases as income rises
Substitutes: Goods or services that can be used for the same or a similar purpose
Complements: Goods and services that are used together
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Demographics: The characteristics of a population with respect to age, race and
gender
Change in Demand versus a Change in Quantity Demanded
• Change in demand – shift of the demand curve (change in one of the
variables other than the price of the product)
• Change in the quantity demanded – movement along the demand curve as
a result of a change in the product’s price
The Supply Side of the Market:
Quantity Supplied: The amount of a good or service that a firm is willing and able to
supply at a given price
Supply schedule: A table that shows the relationship between the price of a product
and the quantity of the product supplied
Supply Curve: A curve that shows the relationship between the price of a product
and the quantity of the product supplied
Market Supply: The supply by all firms of a given good or service
Law of Supply: Holding everything else constant, an increase in the price of a
product causes an increase in the quantity supplied, and a decrease in the price of a
product causes a decrease in the quantity supplied
Variables that Shift Supply:
• Price of inputs
• Technological change
• Prices of substitutes in production
• Number of firms in the market
• Expected future prices
Technological Change: A change in the ability of a firm to produce output with a
given quantity of inputs
Productivity: The output produced per unit of input
Change in Supply versus a Change in Supply Demanded
• Change in supply – shift of the supply curve (change in one of the variables
other than the price of the product)
• Change in the supply demanded – movement along the supply curve as a
result of a change in the product’s price
Market Equilibrium: Putting Demand and Supply Together
Market Equilibrium: A situation in which quantity demanded equals quantity supplied
Competitive Market Equilibrium: Market equilibrium with any buyers and many sellers
Surplus: A situation in which the quantity supplied is greater than the quantity
demanded
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Document Summary
Chapter 3: where prices come from: the interaction of demand and. Consumers ultimately determined which goods and services will be produced = consumer sovereignty. Demand schedule: a table showing the relationship between the price of a product and the quantity of the product demanded. Quantity demanded: the amount of a good or service that a customer is willing and able to purchase at a given price. Demand curve: a curve that shows the relationship between the price of a product and the quantity of the product demanded. Market demand: the demand by all the consumer of a given good or service. Law of demand: holding everything else constant, when the price of a product falls the quantity demanded will increase, and when the price of a product rises the quantity demanded will decrease. Ceteris paribus: the requirement that when analysing the relationship between two variables such as price and quantity demanded other variables must be held constant.
