Supply and Demand

# Supply and Demand - Supply and Demand Demand Curve A list...

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Supply and Demand Demand Curve - A list of how much you would LIKE to purchase (the quantity demanded) at each possible price. Or another way to think of the demand curve is as a “willingness to buy” curve. It represents not how much we would actually buy at each price, but how much we would LIKE TO BUY at each different price. Let us take an example. Suppose you are considering going to the grocery store to buy some coffee. How much coffee would you like to buy at different prices? Price of coffee ..................... Quantity Demanded (Q d ) ..... 20 ............................................. 0 ..... 15 ............................................ 10 ..... 10 ............................................ 20 ..... 5 .............................................. 30 When the price is \$20 per pound, you feel that is too expensive and you do not want to buy any coffee. Your quantity demanded is zero. When the price falls to \$15 per pound you would like to buy 10 pounds of coffee. So your quantity demanded is 10. Associated with each price there is a quantity demanded. This whole set of information in the table above that gives us different quantities demanded associated with different prices is called the Demand . When we put this information in a graph (with Quantity on the horizontal axis and Price on the vertical axis) we get the Demand Curve. The Law of Demand states that as prices rise we would like to buy less and hence quantity demanded falls. As prices fall, we would like to buy more and so quantity demanded increases. The demand curve slopes downwards. What else determines how much coffee you would like to buy? The demand curve is the relation between each possible price and the quantity that would be demanded at that price. Not too surprisingly, at lower prices more is demanded. We are considering this relationship under conditions of “ ceteris paribus, ” or “all other things held constant.” This is not to discount the possibility that other things can change but instead to focus on identifying specific effects of changes in given factors.

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Demand Quantity Price Q1 Q2 P1 P1 A B Figure 1: Movement from point A to point B on the same demand curve in response to a change in price causing a change in The demand curve shows how much would be the change in quantity demanded for a given change in price, assuming that the only thing that changes in the whole world is the price of this good; not consumer income, not prices of other goods, not the weather, not the quality of the good, nothing. Ah, but things in the world really do change; what then? We classify all the things in the world that can affect the demand relationship into four categories. When one of these things changes, it changes how much is quantity demanded at each possible price. When the price changes we move from one point on the demand curve to another. For example in our coffee example above, if the price of coffee dropped from \$15 to \$10 we would change our quantity demanded from 10 to 20. We have now moved from point A (represented by a price of \$15 and quantity demanded of 10) to point B (represented by a price of \$10 and a quantity demanded of 20). So when PRICE changes there is a change in QUANTITY DEMANDED. This is represented by a movement from one point o another on the same demand curve.

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