Econ 1051: Chapter 3
The Model of Supply and Demand: Where Prices Come From
A. Demand schedules tables showing relationship between price and product
with quantity of product demanded. How much of a good are you willing
to consume at a certain price?
B. Demand curve shows relationship between price and quantity demanded.
(market demand= demand by ALL consumers in market of good/service).
Sloping curve shows relationship.
C. The Law of Demand ceteris paribus, when prices of a product fall,
quantity demanded will increase (you’re most willing/able to buy when
prices are low). Why:
1. substitution effect: when the price of something falls consumers are
more likely to purchase it than a comparable good (if Monster is
cheap, people will buy it over lattes)
2. income effect: quantity of goods a consumer can buy with fixed
income increases when price is lowered (purchasing power up). “I feel
D. Variables shifting market demand
1. income affects willingness and ability to buy a good
a. normal good good for which demand increases as income rises
and decreases as income falls
b. inferior good good for which demand increases as income falls
and decreases as income rises (ramen, because when you’re poor
you buy more of it)
2. prices of related goods
a. substitutes (see above)
b. complements goods and services used together, so when demand
for one increases so does demand for the other (hot dogs and buns)
4. population when population increases,