Chapter 2: Demand & Supply

Chapter 2: Demand & Supply  Demand schedule
Demand A table/list that shows the quantity

demanded at each price.
behavior of buyers’ relationship
between quantity demanded of a good Example:
price. Price = $/Bottle
refer to the amount of some good or Qd = bottles/day
service consumers are willing and able to
purchase at each price. P Qd
holding other factors constant  $2.00 0
Demand $1.50 1
quantity demanded (qd) curve $1.00 2
amount of good or service or the $0.50 3
a graph
total number of units purchased at that of demand schedule. It shows the
price. relationship between price and quantity
Law of demand demanded on a graph.
The inverse relationship between Example:

price and quantity demanded.
A rise in the price of a good or
service almost always decreases the
quantity of that good or service demanded.
Conversely, a fall in price will increase the
quantity demanded.
Assumes that all other variables that
affect demand are held constant.
Basic types of demand:
Why?
 Individual demand
Higher price makes you feel poorer.
Income effect - change in Demand curve for 1 buyer or firm. It
demand for a good or service caused by a represents the quantity of a good that a
change in a consumer's purchasing power single consumer would buy at a specific
resulting from a change in real income. price point at a specific point in time.
Higher price on one good, substitute  Market demand

other goods.
Demand curve for all buyers. Add
Substitution effect - the up individual quantity demand for each
decrease in sales for a product that can be price. It is the total amount of goods and
attributed to consumers switching to services that all consumers are willing and
cheaper alternatives when its price rises. able to purchase at a specific price in a
marketplace.
Demand in two ways:
Changes in demand:
Our assumption is to hold other  Decrease in demand
things constant. Allow only price to
change. Decrease in quantity demanded at
every price. Demand curve shifts to left.
Describes a shift in consumer desire
to purchase a particular good or service, Example:
irrespective of a variation in its price.
What if other factors do change?
It will cause a change in demand as
well as it will shift to a new demand curve.
 Increase in demand
Increase in quantity demanded at
every price. Demand curve shifts to right. Factors affecting demand:
Example: Income
For normal goods, an increase in
income will increase demand.
Example:
CDs, bottled water, eating out
 Prices of related goods

 Buyer expectations
 Number of buyers
 Preferences
What happens to equilibrium?
Which curve is affected?
Buyers or sellers?
Supply curve
Bottles are an input.
Increase or Decrease in supply?
Market equilibrium Increased in cost of input
What will be the price of bottled Supply decreases

water? Shift LEFT
Price at which Qs = Qd
 Equilibrium price
 Equilibrium quantities
Example:
Note:
 Changes in supply causes change in
equilibrium price.
BUT
 Change in price does NOT cause
Why is this an equilibrium? change in supply.
 If Qs > Qd then it is surplus Example 2:
Price falls until Qs = Qd Market for bottles water
 If Qs < Qd then it is shortage Sugar is found harmful to health
Price rises until Qs = Qd
Changes in equilibrium
If supply and/or demand changes
Demand curve
(shifts left or right), then equilibrium will
change too. Health concerns increase
Example 1: Preferences for water
Market for bottled water Increase or Decrease in supply?
Price of plastic bottle rises Increase in preference for water
Demand increases
Shift RIGHT
Example 3:
Market for bottled water
Incomes fall and sellers expect
utilities to rise
Demand curve - Income falls
Supply curve – seller expectations
change, expect costs to rise
Increase or Decrease?
Demand decreases (left) – income
falls, and bottled water is normal good.
Supply increases (right) – make
more water today before costs go up.
Example 4: Leather Sandals

Market for leather sandals
A. Mad cow disease – must destroy
20% of herds

Chapter 2: Demand & Supply

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Chapter 2: Demand & Supply  Demand schedule

Demand A table/list that shows the quantity

The inverse relationship between Example:

Higher price on one good, substitute  Market demand

 Prices of related goods

Market equilibrium Increased in cost of input

What will be the price of bottled Supply decreases

Example 4: Leather Sandals

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