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Unformatted text preview: 1 3- 1 DEMAND, SUPPLY AND PRICE Slides by Alex Stojanovic with additions by Winston Moore 3- 2 Learning Outcomes • The participants in markets and what motivates them • The main factors that influence how much of a product consumers wish to buy • The main influences on how much producers wish to sell • How consumers and producers interact to determine the market price • While demand and supply forces are present in all markets, many different institutional structures also affect market outcomes 3- 3 Individuals and Motives • Assume that each individual consumer seeks maximum satisfaction, or well-being or utility as it is called in economics. • The consumer maximises utility with the limits set by his or her available resources. 3- 4 The Nature of Demand • The amount of a product that consumers wish to purchase is called the quantity demanded. – Quantity demanded is a desired quantity, not how much they actually succeed in purchasing. – Quantity demanded is a flow. We are concerned not with a single purchase, but with a continuous flow of purchases, e.g. 1 million oranges per day or 7 million oranges per week 3- 5 Determinants of Demand • Five main variables influence the quantity of each product that is demanded by each individual consumer: – The price of the product – The prices of other products – The consumer’s income and wealth – The consumer’s tastes – Various individual-specific or environmental factors. 3- 6 Determinants of Demand (cont’d) • The demand function above is a shorthand way of saying that quantity demand (on the left-hand side) depends on the variables that are listed on the right- hand side. • To simplify the analysis we assume that all except one of the variables on the right-hand side is held constant, thus the term ceteris paribus (all other things held constant or other things being equal). • Convention to assume that all other factors except the price of the good is held constant. ) , , ,..., , ( 1 1 S Y p p p D q n n d n- = 2 3- 7 Demand and Price • How will the quantity of a product demanded vary as its own price varies? • A basic economic hypothesis is that the lower the price of a produce, the larger the quantity that will be demanded, other things being equal. • Referred to as the law of demand. • If the price of a product rises, some consumers will stop buying it altogether, others will buy smaller amounts, and others will buy the same amount, but no rational consumer will buy more. 3- 8 Demand and Price (cont’d) • A demand schedule is one way of showing the relationship between quantity demanded and price. • One can plot this on a diagram, where you call it a demand curve....
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- Spring '11