1. Module Supply and Demand: Introduction and Demand5
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson

2. What you will learn in this Module:
What a competitive market is and how it is described by the supply and demand model
What the demand curve is
The difference between movements along the demand curve and changes in demand
The factors that shift the demand curve

3. Supply and Demand: A Model of a Competitive Market
Supply and Demand Model i
Start with a definition of a market:
A market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services.
1. A market may be local, national, or international in scope.
2. Some markets are highly personal with face‑to‑face exchanges and flexible prices (a garage sale or estate auction) while others are impersonal and remote (global market for oil or coffee beans).
3. This chapter concerns competitive markets with a large number of independent buyers and sellers.
4. Each of these buyers and sellers are so small that they cannot affect the price of the product.
Stress to the students that the assumption of competitive markets just simplifies the analysis. Much information can be gained by looking at demand and supply in a competitive market, and in later chapters of a microeconomics textbook, students would study markets that are not competitive.

4. The Demand Curve Demand schedule Quantity demanded Demand curve
Law of Demand
A. Demand Schedule and Curve
Demand is a schedule that shows how much of a product consumers are willing and able to buy at each of a series of possible prices during a specified time period.
The demand schedule shows that when the price is high, the quantity of sodas demanded is low. This relationship is known as the Law of Demand.
Law of demand is a fundamental characteristic of demand behavior.
1. Other things being equal, as the price increases, the corresponding quantity demanded falls.
2. Restated, there is an inverse relationship between price and quantity demanded.
3. Note the “other things being equal” assumption which refers to a handful of other factors that affect our demand for a good. These will be covered shortly.

5. Demand Schedule and Demand Curve
Price
Quantity
$ 8 3
$ 7 5
$ 6 7
$ 5 10
$ 4 12
$ 3 16
$ 2 22
Price
Quantity

6. Understanding Shifts of the Demand Curve
Increase = right, Decrease = left
M.E.R.I.T. shifts demand
market size (number of consumers)
expectations
related prices (complements, substitutes)
income (normal, inferior)
tastes
There are several “shifters” of demand or the “other things,” besides price, which affect demand.
Changes in a shifter cause changes in demand.
If demand has increased, it has shifted to the right. At any price, consumers wish to buy more.
If demand has decreased, it has shifted to the left. At any price, consumers with to buy less.
1. Prices of related goods
i. Substitute goods (those that can be used in place of each other):
Price of substitute and demand for the other good are directly related. If the price of Nike shoes rises, the demand for New Balance shoes should shift to the right.
ii. Complementary goods (those that are used together like tennis balls and rackets):
When goods are complementary, there is an inverse relationship between the price of one and the demand for the other. If the price of tennis rackets rises, demand for tennis balls will shift to the left.
2. Income
i. Normal goods
More income leads to an increase in demand; less leads to decrease in demand for most goods and services. Steak is a normal good. So are textbooks, running shoes, and iPods.
ii. Inferior goods
For a few goods, more income leads to a decrease in demand. City bus tickets are inferior goods. So are second-hand clothing and store-brand food items.
3. Tastes
A favorable change in tastes leads to an increase in demand; an unfavorable change to a decrease.
EX. Demand for a sport team’s apparel increases when the team is winning.
4. Expectations
Consumers have expectations about future prices, product availability, and income, and these expectations can shift demand.
EX. If I expect the price of gas to decrease next week, my demand for gas will decrease this week. I will wait for the price to fall.
Ex. If I take a new job and expect my salary to rise next month, I may increase my demand for a new suit today.
5. Number of buyers—the more buyers lead to an increase in demand; fewer buyers lead to decrease. EX. Demand for prescription drugs has increased, as the population has grown older.
Ex. Demand for infant formula would decrease if families had fewer babies.

7. Figure 5.1 The Demand Schedule and the Demand Curve Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

8. Figure 5.2 An Increase in Demand Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

9. Figure 5.3 A Movement Along the Demand Curve Versus a Shift of the Demand Curve Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

10. Figure 5.4 Shifts of the Demand Curve Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

11. Figure 5.5 Individual Demand Curves and the Market Demand Curve Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers

12. Table 5.1 Factors That Shift Demand Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers