Eco 6351 Economics for Managers Chapter 3a. Supply and Demand Prof. Vera Adamchik

Demand and Supply Demand and supply explain how prices and quantities bought and sold are determined

If you demand something, then you… Want it, Wants are the unlimited desires or wishes that people have for goods and services. Most of our wants will never be satisfied. Thus, wants are not demand. Can afford it, and Have made a definite plan to buy it.

Demand vs Quantity demanded The quantity demanded is the amount of a good or service that consumers plan to buy in a given period of time and at a particular price. The term demand refers to the entire relationship between the quantity demanded and the price of a good, ceteris paribus, and it is illustrated by the demand schedule and the demand curve.

Demand Schedule A list showing the quantities of a good that consumers would choose to purchase at different prices, ceteris paribus.

The Demand Schedule Price Quantity demanded ($/tape) (mill. tapes/week) a 1 9 b 2 6 c 3 4 d 4 3 e 5 2

Demand Curve The graphical depiction of a demand schedule; a curve showing the quantity of a good or service demanded at various prices, ceteris paribus.

The Demand Curve

What determines buying plans? The price of the good The prices of related goods Income and wealth Population Preferences and tastes Expected future prices

The Law of Demand Ceteris paribus, the higher the price of a good, the lower is the quantity demanded of that good. A change in a good’s price causes us to move along the demand curve. We call this a change in quantity demanded.

What makes demand change? 1. The prices of other goods Substitutes in consumption Complements in consumption 2. Income and wealth Normal goods Inferior goods 3. Population 4. Preferences and tastes 5. Expectations

A substitute is a good that can be used in place of another good. A complement is a good that is used in conjunction with another good. A normal good is one for which demand increases as income increases. An inferior good is one for which demand decreases as income increases.

A Change in Demand Price Quantity demanded ($/tape) (mill. tapes/week) (W. $200) (W. $50) a a' b b' c c' d d' e e'

Figure shows a change in demand When demand changes, the demand curve shifts A Change in Demand

When the price of a good changes, there is a change in the quantity demanded, which is shown by a movement along the demand curve When any other influence on buying plans changes, there is a change in demand, which is shown by a shift of the demand curve Change in quantity demanded vs. Change in demand

Figure shows the distinction between a change in the quantity demanded and a change in demand