1. Understanding Economics
Chapter 2
Supply and Demand

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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

12. 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

14. 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

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

16. 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

17. 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

18. 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

19. 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

20. Try Worksheet