Price and Quantity Demanded. DEFINITION 1: Demand is a relationship between two specific variables: Price and Quantity Demanded. [a number of other relevant variables are kept constant]

DEFINITION 2: Quantity demanded of a good is the amount of that good that buyer(s) are willing and able to purchase

Determinants of quantity demanded 1 Price of the good 2 Consumer’s Income 3 Price of related goods [substitutes and complements] 4 Taste 5 [Expectations]

Demand Curve The individual demand curve shows the quantity demanded at each price by one consumer.

one more time…. The demand curve gives the relationship between price and quantity demanded, assuming that all other determinants of quantity demanded are kept constant.

The Law of Demand Other things being equal, the quantity demanded of a good rises when the price of the good falls. [Also, when the price rises, quantity demanded falls.]

Changes in Quantity Demanded Price of Ice-Cream Cones A tax that raises the price of ice-cream cones results in a movement along the demand curve. B $2.00 A 1.00 D 4 8 Quantity of Ice-Cream Cones

Alfred Marshall’s version of L of D "There is then one general law of demand: The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price." Alfred Marshall, (1842-1924) Principles of Economics, 8th edition (London: Macmillan, 1920), 99 [originally published in 1890]

Change in demand vs Change in Quantity Demanded Very important statement: A change in the price of a good will cause a change in the quantity demanded of that good, but will not cause a change in the demand for that good.

Change in Demand Change in Quantity Demanded

Change in Quantity Demanded Movement along the demand curve. Caused by a change in the market price of the product.    Change in Demand A shift in the demand curve, either to the left or right. Caused by a change in a determinant other than price.

Shifts in the demand curve 1. Consumer Income As income increases, the demand for a normal good will increase. [As income decreases, the demand for a normal good will decrease.] As income increases, the demand for an inferior good will decrease. [As income decreases, the demand for an inferior good will increase.]

Normal good

Inferior good

Related goods: Substitutes Substitutes are goods that can serve as replacements for one another; Therefore, when the price of one increases, demand for the other goes up. Perfect substitutes are identical products.

Related goods: Complements Complements are goods that “go together”; a decrease in the price of one results in an increase in demand for the other, and vice versa.

Complements (complementary goods): Peanut butter and jelly When the price of peanut butter rises, demand for jelly falls, that means : the demand curve for jelly shifts to the left.

Substitute goods : Tea and Coffee When the price of coffee rises, demand for tea increases, that means : the demand curve for tea shifts to the right.

Taste

Expectations A change in expectations If consumers believe the price will increase in the future, demand increases today (when the good is cheaper); this shifts the demand curve to the right.

From individual demand curves to the market demand curve

Determinants of quantity supplied SUPPLY DEFINITION 1. Supply is a relationship between two (2) specific variables: Price and quantity supplied. DEFINITION 2. The quantity supplied of a good is the amount of a good that sellers are willing and able to produce.  Determinants of quantity supplied Price of the good Input prices Technology [Expectations]

The Supply (Curve) The supply curve gives the relationship between price and quantity supplied, assuming that all other determinants of supply (e.g., input prices, technology, etc.) are constant.

A supply curve for candy bars

The LAW of Supply Other things being equal, the quantity supplied of a good rises when the price of the good rises.

A supply curve for ice-cream

From the individual supply (curves) to the market supply (curve) The market supply curve is the horizontal sum of the supply curves of all the suppliers. Just as individual supply curves have a positive slope, so do market supply curves.

Change in Quantity Supplied is a Movement along the supply curve. It is caused by a change in the market price of the product. Change in Supply is a shift in the supply curve, either to the left or right. It is caused by a change in a determinant other than price. (input prices or technology)

Shifts in the supply curve Price of Supply curve, S 3 Ice-Cream curve, Supply S 1 Cone Supply curve, S 2 Decrease in supply Increase in supply Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning

Variable A change in this variable Price a movement along the supply curve Input prices an increase shifts the supply to the left a decrease shifts the supply to the right Technology an improvement shifts the supply to the right