DEMAND, SUPPLY, AND THE PRICE SYSTEM
Lecture 6 presented the concept of demand as a scientific subject of analysis,
and we made assumptions that enabled us to begin the discussion of
demand within the context of a specific market:
the market for pizza in
We used casual empiricism to bound the demand for pizza per week
in the Tempe pizza market and assumed that the average weekly demand by
households amounted to 15,000 pizzas per week, at an average price of $10
FACTORS THAT AFFECT DEMAND
Assuming that the average level of sales of pizza in our market is 15,000
pizzas per week, what are some things that, if they changed, would change
the demand for pizzas in our market as measured by the number sold per
Let’s make a list.
THE PRICE OF PIZZA
We will jump ahead to the conclusion that we
are setting out to demonstrate:
If the price of pizzas rises from $10 each to
$20 each, a smaller number than 15,000 per week will be demanded and
If the price of pizzas falls from $10 each to $5 each, a larger
number than 15,000 per week will be demanded and purchased.
We call this
the “own price” of pizza, that is, the price of pizza “its ownself.”
(See #3 and
It is costly to dine out, compared with preparing meals within
If the average income of the households in our market that
have a demand for pizza increases, the number of pizzas demanded per
week will increase.
If the average income of the households in our market
that have a demand for pizza decreases (as in the Great Depression, when
25 percent of the labor force was unemployed, without pay) the number of
pizzas demanded per week will decrease.
THE PRICE OF SUBSTITUTES
Some economic goods are substitutes
for each other, with respect to consumers.
We can either spread butter or
margarine on our bread.
We can drink tea or coffee with breakfast.
drink water or a soft-drink with our lunch.
We can eat a pizza or a subway
sandwich for dinner.
If the price of a substitute (sub sandwich) falls, we will
demand more of the substitute, and the demand for pizzas, the “good in
question” will decrease.
In other words, if we are in our market looking to