Richard Damra Thursday, January 17, 2013
Econ 1B03 – Chapter 4 Supply and Demand
Market: group of buyer and sellers of a particular good or service
The terms supply and demand refer to the behavior of people as they interact with one another
Market demand: refers to the sum of all individual demands for a particular good or service
Market supply: refers to the sum of all individual supplies of a particular good or service.
There are different types of market structures
o Competitive market: so many buyers and sellers that each one has a negligible (if any)
impact on market price
o Perfectly competitive market: all goods are homogenous (identical)
o Since no buyer or seller can influence price, each is a price taker. We will assume
markets are perfectly competitive
Quantity demanded, Qd: amount of good or service that consumers are willing and able to buy
at a given price, P.
When the price of a good increase, you buy less of that good
We say that price and Qd are negatively related
As Price increase Qd decrease
Law of Demand
o Other things being equal (ceteris paribus), when the price of a good rises, the quantity
demanded of that good falls.
Other Determinants of Demand
o Normal good: When income increase and you buy more of that good (or if income
decrease you buy less)
o Inferior good: When income increase and you buy less of that good (or if income
decrease you buy more)
Most goods are normal goods. Examples of inferior goods include Kraft Dinner (as your income
increases, you don’t have to eat KD anymore- you can afford steak) and bus rides (as income
increases, you can take a cab or buy a car).
Prices of related goods
1. Substitutes: if Price of a good increases and the demand of another good then increases,
these are substitutes Richard Damra Thursday, Janua