Chapter 3- Demand and Supply (pages 56-77)
Market and Prices
A market is any arrangement that enables buyers and sellers to get
information and do business with each other.
A competitive market is a market that has many buyers and many sellers so
no single buyer or seller can influence the price.
The money price of a good is the amount of money needed to buy it.
The 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.
If you demand something, then you
1. Want it,
2. Can afford it, and
3. Have made a definite plan to buy it.
Wants are the unlimited desires or wishes people have for goods and
services. Demand reflects a decision about which 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.
The Law of Demand
The 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.
The law of demand results from
o 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 decreases.
o 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.
Demand Curve and Demand Schedule
The term demand refers to the entire relationship between the price of the
good and 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 on consumers’ planned
purchases remain the same.
Quantity demanded refers to a point on the demand curve. A rise in the price, other things remaining the same, brings a decrease in the
quantity demanded and a movement up along the demand curve.
A fall in the price, other things remaining the same, brings an increase in the
quantity demanded and a movement down along the demand curve.
Willingness and Ability to Pay
A demand curve is also a willingness-and-ability-to-
The smaller the quantity available, the higher is
the price that someone is willing to pay for
Willingness to pay measures marginal benefit.
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.
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
The prices of related goods
A substitute is a good that can be used in place of another good.
A complement is a good that is used in conjunction with another
good. Ex: Coffee and Milk
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
Expected future prices
If the expected future price of a good rises, current demand for the
good increases and the demand curve shifts rightward.
When income increases, consumers buy more of most goods and the
demand curve shifts rightward.
A normal good is one for which demand increases as income
increases. Ex: demand for air travel increases.
An inferior good is a good for which demand decreases as income
increases. Ex: demand for long-distance bus trip decrease.
Expected future income and credit
When expected future income increases or when credit is easy to
obtain, the demand might increase now. Population
The larger the population, the greater is the demand for all goods. Ex:
If the age group 20-24 increased over past 4 years, then the demand
for university places would increase.
People with the same income have different demands if they have
different preferences. Factors that influence preferences include
weather, information and fashion.
Change in Quantity Demanded Vs. Change in Demand
When the price of the good changes and everything else
remains the same, the quantity demanded changes and
there is a movement along the demand curve. (Point
moves on the demand curve)
If the price remains the same but one of the other
influences on buyers’ plans changes, demand changes and
the demand curve shifts. Ex: Price of compliments
If a firm supplies a good or service, then the firm
o 1. Has the resources and the technology to produce it,
o 2. Can profit from producing it, and
o 3. Has made a definite plan to produce and sell it.
Resources and technology determine what it is possible to produce. Supply
reflects a decision about which technologically feasible items to produce.
The quantity supplied of a good or service is the amount that producers plan
to sell during a given time period at a particular price.
The Law of Supply
The law of supply states:
Other things remaining the same, the higher the price of a good, the greater is
the quantity supplied; and
The lower the price of a good, the smaller is the quantity supplied.
The law of supply results from the general tendency for the marginal cost of
producing a good or service to increase as the quantity produced increases.
Producers are willing to supply a good only if they can at least cover their
marginal cost of production. Supply Curve and Supply Schedule
The term supply refers to the entire relationship between the quantity
supplied and the price of a good.