Economics Chapter 3: Supply and Demand
any arrangement that enables buyers and sellers to get information and to do business
with each other
-Has two sides: buyers and sellers
-There are markets for goods, services, resources (computer programmers), and other
manufactured inputs (computer chips)
-Can be a physical place, groups of people spread around the world through e-commerce, or
like most markets, unorganized collections of buyers and sellers
-Some markets are simple, others are more complex
-Markets determine prices through buyers and sellers
-Flower market in Holland
-Competitive market is a market that has many buyers and many sellers so no single buyer
or seller can influence the price
-Producers offer items at a high enough price to cover their opportunity costs, consumers
respond to this by seeking lower priced alternatives
-Money price of a good is the amount of money needed to buy it.
-Relative price of a good—the ratio of its money price to the money price of the next best
alternative good—is its opportunity cost.
-To express relative price we use a ‘basket’ of all goods and services
-To calculate divide money price of a good by price index, which results in the opportunity
cost of goods in terms of how much of the basket we must give up to buy it
-Demand and supply model determine relative price
1) we want it
2) We can afford it
3) We plan to buy it
-Wants are the unlimited desires or wishes people have for goods and services.
-Demand reflects a decision about what wants to satisfy
-The quantity demanded of a good or service is the amount that consumers plan to buy
during a particular time period, and at a particular price.
-Quantity demanded is not the same as quantity bought
-time is important because you may demand a large unit over a long period of time
-buyers; aka demanders
Law of Demand
States: Other things remaining the same, the higher the price of a good, the smaller is the
quantity demanded; and the lower the price of a good, the larger is the quantity demanded.
-not by any particular percentage; just a directional prediction
The law of demand results from:
Substitution effect: When the relative price (opportunity cost) of a good or service
rises, people seek substitutes for it, so the quantity demanded of the good or service
-Figuring out ways of replacing or economizing to replace the good you can no
longer afford Income effect: When the price of a good or service rises relative to income, people
cannot afford all the things they previously bought, so the quantity demanded of the
good or service decreases.
-Can afford less of things than you could before
-Faced with higher price and unchanged income people must decrease their demand
for some goods and services
-Quantity demanded decreases when price rises
Demand Curve and Demand Schedule
-Demand refers to the entire relationship between the price of the
good and quantity demanded of the good.
-not a quantity
-Quantity Demanded is a point on the demand curve-the quantity
demanded at a particular price
-Demand curve shows the relationship between the quantity
demanded of a good and its price when all other influences on
consumers’ planned purchases remain the same.
-Uses a graph
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 willing to pay
for another unit.
-Willingness to pay measures marginal benefit.
-doesn’t have a one way relationship: x doesn’t cause Y
A Change in Demand
-When some influence on buying plans other than the price of the good changes, there is a
change in demand for that good.
-entire relationship changes
-The quantity of the good that people plan to buy changes at each and every price, so there
is a new demand curve.
-When demand increases, the demand curve shifts rightward.
-When demand decreases, the demand curve shifts leftward.
Six main factors that change demand are
1. The prices of related goods
-substitute is a good that can be used in place of another good.
-ex. Coke and coffee
-If price of coke goes up, demand for coffee may increase
-Complement is a good that is used in conjunction with another good.
-Gasoline and cars: when the price of a complement change the demand for the item
-When the price of substitute for an energy bar rises or when the price of a
complement of an energy bar falls, the demand for energy bars increases.
2. Expected future prices
-If the price of a good is expected to rise in the future, current demand for the good
increases and the demand curve shifts rightward as long as the good can be stored
-Substituting with time; consumers retime their purchases 3. Income
-When income increases; consumers buy more of most goods and the demand curve
-A normal good is one for which demand increases as income increases.
Housing, transportation, food, travel
-An inferior good is a good for which demand decreases as income increases.
Purchased by low income people, when income rises they will stop buying these
goods and move onto normal goods
4. 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 larger the population, the greater is the demand for all goods.
-People with the same income have different demands if they have different
-People place different values on different goods and services
-ex. On-going preference moving away from cigarettes due to growing health
A Change in the Quantity Demanded Versus a Change in Demand
Movement Along the Demand Curve