CH 3 - Demand Demand a relationship between price and the...

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Unformatted text preview: Demand Demand a relationship between price and the quantity demanded, all other things equal. Quantity Demanded the quantity of a good that people want to buy at a given price during a specific time period. Demand Demand Schedule: a tabular representation of demand. The information it contains describes the quantity of a good that a buyer is willing to purchase at different prices. Figure 1: The Demand Curve The Law of Demand Law of Demand: the tendency for the quantity demanded of a good to decline as its price rises. The Law of Demand According to the law of demand, a lower price will result in an increase in the quantity of the good that consumers are willing to buy, holding all else constant. A change in price only leads to a movement along the demand curve A lower price Leads to a higher quantity demanded Shifts in Demand Changes in the following can cause the demand curve to shift to the left or to the right: Consumers' Preferences Consumers' Information Consumers' Income Number of Consumers in the Market Consumers' Expectations of Future Prices Prices of Closely Related Goods a) Substitutes b) Complements Consumers' Preferences Example: After September 11, 2001, more consumers were afraid to fly, resulting in a decrease in the demand for air travel. The demand for gasoline increased, as people chose to drive more to different destinations. Consumers' Information Examples: Car owners bought fewer Firestone tires once they learned of the mass recall of Firestone tires. Demand for Krispy Kreme doughnuts declined when people got information that eating fewer carbohydrates can facilitate weight loss (e.g., as in the Atkins diet). Consumers' Incomes Normal Goods goods for which demand increases when the consumers' income rises and decreases when consumers' income falls. Examples: Jewelry Luxury cars Consumers' Incomes Inferior Goods goods for which demand decreases when the consumers' income rises and increases when consumers' income falls. Examples: Instant noodles Bus tickets Number of Buyers in the Market More consumers in the market will likely result in a larger demand for the good or service, while fewer consumers will likely result in a smaller demand for the good or service. Example: The demand for electricity in your city increases as the population increases. Consumers' Expectations of Future Prices Expectations of higher future prices will increase demand now. Expectations of lower future prices will decrease demand now. Example: Expectations of higher prices of gasoline in the future tend to make individuals fill up now. Prices of Closely Related Goods Substitute a good that has many of the same characteristics as and can be used in place of another good. Examples: Coke is a substitute for Pepsi. Riding a car is a substitute for taking the bus. Downloading music is a substitute for buying music CDs. Prices of Closely Related Goods Complement a good that is consumed or used together with another good. Examples: Gasoline is a complement to SUVs. Cream is a complement to coffee. Prices of Closely Related Goods If two goods are complements, then an increase in the price of one good will result in a decrease in the demand for the other good. If two goods are substitutes, then an increase in the price of one good will result in an increase in the demand for the other good. Figure 2: A Shift in the Demand Curve Figure 3: Shifts of versus Movements Along the Demand Curve Supply Supply a relationship between price and the quantity supplied, all other things equal. Quantity Supplied the quantity of a good that sellers want to sell at a given price during a specific time period. Supply Supply Schedule: a tabular representation of the supply curve. Figure 4: The Supply Curve The Law of Supply Law of Supply the tendency for the quantity supplied of a good in a market to increase as its price rises. The Law of Supply According to the law of supply, a higher price will result in an increase in the quantity of the good that sellers are willing to sell, holding all else constant. A change in price causes a movement along the supply curve A higher price Leads to a higher quantity supplied Shifts in Supply Changes in the following can cause the supply curve to shift to the left or to the right: Technology Weather conditions Prices of inputs used in production Number of firms in the market Expected future selling price Government taxes, subsidies, and regulations Shifts versus Movement Movement Along the Supply Curve occurs when a change in the quantity supplied of a good is brought along by a change in its price. A Shift in the Supply Curve occurs when a change is brought along by any source other than the price. Figure 6: Shifts of versus Movements Figure 7: Overview of Supply and Demand Market Equilibrium Equilibrium Price the price at which the quantity that sellers are willing to sell equals the quantity that consumers are willing to purchase. Equilibrium Quantity the quantity traded at the equilibrium price. Market equilibrium. Figure 8: Equilibrium Price and Equilibrium Quantity Figure 8: Equilibrium Price and Equilibrium Quantity Effects of an Increase in Demand An increase in demand will shift the demand curve to the right, resulting in a higher equilibrium price and quantity. Effects Figure 9(a): of a Shift in Demand Effects of a Decrease in Demand A decrease in demand will shift the demand curve to the left, resulting in a lower equilibrium price and quantity. Figure 9(b): Effects of a Shift in Demand Effects of an Increase in Supply An increase in supply will shift the supply curve to the right, resulting in a lower equilibrium price and a higher equilibrium quantity. Figure 10(a): Effects of a Shift in Supply Effects of a Decrease in Supply A decrease in supply will shift the supply curve to the left, resulting in a higher equilibrium price and a lower equilibrium quantity. Figure 10(b): Effects of a Shift in Supply Figure 11: Combined Effect of a Simultaneous Increase in Demand and Decrease in Supply of Gasoline Key Terms demand price quantity demanded demand schedule law of demand demand curve normal good inferior good substitute complement supply quantity supplied supply schedule law of supply supply curve shortage (excess demand) surplus (excess supply) equilibrium price equilibrium quantity market equilibrium ...
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This note was uploaded on 06/01/2010 for the course ECONOMICS STA2012 taught by Professor Fan during the Spring '10 term at A.T. Still University.

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