Understanding Economics Chapter 2 Supply and Demand

Learning Objectives In this chapter, you will: consider the nature of demand, changes in quantity demanded, changes in demand, and the factors that affect demand examine the nature of supply, changes in quantity supplied, changes in supply, and the factors that affect supply see how markets reach equilibrium – the point at which demand and supply meet

Your Demand Curve for Strawberries The Demand Curve Your Demand Curve for Strawberries Your Demand Schedule for Strawberries 2.50 a b Quantity Demanded (kg per month) Point on graph 2.00 Price ($ per kg) c 1.50 Price ($ per kg) D $2.50 7 a 1.00 2.00 9 b 0.50 1.50 11 c Consider strawbeeries you eat each month.. You might buy 2kg/month when price is $2 If price is $2.50, you’ll purchae more IF price drops to 1.50, you’ll buy more / month. At the lower price.. Strawberries become a better deal I nterms of the satisfaction you get from each dollar spent..therefore you might decide to increase your puchases to 3kg per month. .. THIS INVERSE RELATIONSHIP between PRICE and QUANTITY DEMANDED, when all other factors are kept constant, is known as the law of demand 1 3 5 7 9 11 13 Quantity Demanded (kg per month) 3

What Is Demand? Demand is a relationship between a product’s price and quantity demanded. Demand is shown using a schedule or curve. The law of demand states that price and quantity demanded are inversely related. Market demand is the sum of quantities demanded by all consumers in a market. Demand Schedule: a table that shows possible combinations of prices and quantities demanded of a product Demand curve: a GRAPH that expresses possible combinations of prices and quantities demanded of a product 1

Deriving Market Demand Your Demand Curve for Strawberries Friend’s Demand Curve for Strawberries 2.50 2.50 2.00 2.00 Price ($ per kg) 1.50 Price ($ per kg) 1.50 1.00 1.00 D0 D1 0.50 0.50 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Quantity Demanded (kg per month) Quantity Demanded (kg per month) Market Demand Curve for Strawberries Individual and Market Demand Schedules for Strawberries 2.50 Price ($ per kg) You (D0) Friend (D1) Market (Dm) 2.00 Price ($ per kg) 1.50 Dm 1.00 (kg per month) 0.50 $2.50 2.00 1.50 1 2 3 2 3 4 3 5 7 1 2 3 4 5 6 7 Quantity Demanded (kg per month) 3

Changes in Demand (a) Changes in demand: are shown by shifts in the demand curve are caused by changes in demand determinants This is when price remains unchanged, the demand for the item changes Demand changes due to other factors besides price of that item 2

Changes in Demand (b) Market Demand Curve for Strawberries Market Demand Schedule for Strawberries 0.50 1.00 1.50 2.00 2.50 Price ($ per kg) Quantity Demanded (millions of kg) (D2) (D0) (D1) Price ($ per kg) D2 D0 D1 $2.50 5 7 9 2.00 7 9 11 1.50 9 11 13 1 3 5 7 9 11 13 Quantity Demanded (millions of kg per year) 3

Demand Determinants (a) Demand determinants include the following factors: Number of buyers Income Price of other products Consumer Preferences Consumer Expectations

Demand Determinants (a) The number of buyers baby boom increases demand for diapers Number of buyers for a certain product increases => more purchases are made => increase in demand => shift of the entire demand curve shifts RIGHT What happens when # of buyers decrease? Q demand decrease -> P decrease => entire demand curve shifts LEFT 4

Demand Determinants (a) Income For normal products, an increase causes a rightward demand shift. Normal products: products whose demand changes directly with income As income increases, your demand will increase For inferior products, an increase causes a leftward demand shift. Inferior products: products whose demand changes inversely with income As income decreases, your demand will decrease

Demand Determinants (b) Prices of other products For substitute products, a rise in the other product’s price causes a rightward demand shift. For complementary products, a rise in the other product’s price causes a leftward demand shift. 5

Demand Determinants (b) Consumer preferences Apples are found to cure cancer Latin music becomes more popular increasing demand for Latin CDs Consumer expectations Gas prices are expected to increase next week, causing consumers to demand more of it this week

Changes in Quantity Demanded are shown by movements along demand curve are caused by price changes of that product or service

Changes in Quantity Demanded (b) 5000 6000 Quantity Demanded (pairs of skis) Change in Quantity Demanded Price ($ per pair of skis) 0.50 1.00 1.50 2.00 5000 Quantity Demanded (pairs of skis) Change in Demand Price ($ per pair of skis) 0.50 1.00 1.50 2.00 a b D0 D0 D1 3

Change in Quantity Demanded Change in Demand Change in Quantity Demanded A change in the quantity demanded of a good or service at every price Movement from one point to another point – from one price-quantity combination to another – on a fixed demand schedule or demand curve

Change in Quantity Demanded Change in Demand Change in Quantity Demanded Buys buy more even at the same price Buyers buy more because the price fell

Is the law of demand ever broken? Veblen Effect An extremely rare situation where the relationship between product’s price and quantity demanded is directly related This may happen when the product price is seen as a status symbol – thus high price leads to more quantity demanded

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