What is demand?
Why is this chapter
important?
Demand represents the
choice making
behavior of buyers
This chapter is very
important because it
introduces basic supply
and demand analysis
1
2
What is the
law of demand?
What is supply?
The principle that there is an
inverse relationship
between the price of a good
and the quantity buyers are
willing to purchase in a
defined time period, ceteris
paribus
Supply represents the
choice making
behavior of sellers
3
4
What is a
demand curve?
What does “ceteris
paribus” mean?
Depicts the relationship
between price and
quantity demanded
All else remains the same
5
6
1
Individual ’s Demand Curve for Compact Discs
P
Individuals Buyer’s Demand Schedule for Compact Discs
A
$20
$15
Point
B
C
$10
Price
per compact disk
Quantity demanded
(per year)
A
B
$20
$15
4
6
C
D
$10
$5
10
16
7
D
$5
Demand Curve
4
8
12 16
Q
Why do demand curves
have a negative slope?
At a higher price buyers will
buy fewer units, and at a
lower price they will buy
more units
7
8
What is
market demand?
What is a
demand schedule?
The summation of
the individual
demand schedules
in a market
Shows the specific
quantity of a good or
service that people are
willing and able to buy at
different prices
9
Market Demand Schedule for Compact Discs
Price
$25
$20
$15
$10
$5
Fred
Mary
Total Demanded
1 + 0 =
2
1
3
3
4
5
5
7
10
P
Fred’s Demand Curve
$20
$15
1
3
6
9
12
$10
$5
11
D1
1 2 34 5 6 7 8 9 Q
12
2
P
P
Mary’s Demand Curve
$20
$15
$20
$15
$10
$10
D2
$5
13
P
D3
$5
1 2 34 5 6 7 8 9 Q
$20
$15
Market Demand Curve
Q
3 4 5 6 7 8 9 101112
14
P
Fred’s Demand Curve
$10
$20
$15
Mary’s Demand Curve
$10
$5
1 2 3 4 5 6 7 8 9 Q
12
P
D2
$5
D1
1 2 3 4 5 6 7 8 9 Q
13
Market Demand Curve
$20
$15
$10
$5
D3
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
DEMANDED AND A
CHANGE IN DEMAND
Q
3 4 5 6 7 8 9 1011 12
15
16
14
When price changes,
what happens?
The curve does not shift
- there is a change in
the quantity demanded
Change in
Quantity
Demanded
Change in
Price
17
18
3
P
A change in price causes a
change in the quantity demanded
$20
$15
Decrease in
quantity
demanded
A
B
$10
$5
10 20
Upward
movement
along the
demand curve
D
Q
30 40 50
Price
increases
19
20
When something
changes other than
price, what happens?
Increase in
quantity
demanded
Downward
movement
along the
demand curve
The whole curve
shifts,there is a
change in demand
Price
decreases
21
P
$20
$15
22
When the ceteris paribus assumption
is relaxed, the whole curve can shift
A
$10
B
Change in
demand
D
D2
$5
10 20
1
Q
30 40 50
23
Change in
nonprice
determinant
24
4
What can cause a
demand curve to shift?
A change in:
• Number of buyers in the market
• Tastes and preferences
• Income
• Expectations of consumers
• Prices of related goods
25
What is a
normal good?
Decrease or
increase in
demand
Leftward or
rightward shift in
the demand curve
Change in a
Nonprice
determinant
26
What is an
inferior good?
Any good for which
there is a direct
relationship between
changes in income
and its demand curve
Any good for which
there is an inverse
relationship between
changes in income
and its demand curve
27
28
What happens when
the price increases for
a good that has a
substitute?
What are
substitute goods?
Goods that compete
with one another for
consumer purchases
The demand curve for
the substitute good
increases
29
30
5
What happens when
the price decreases for
a good that has a
substitute?
The demand curve for
the substitute good
decreases
What does a direct
relationship
between price and
quantity mean?
The two move in the
same direction
31
What are
complementary goods?
Goods that are
jointly consumed
with another good
32
What happens when
the price increases for
a good that has a
complement?
The demand curve for
the substitute good
decreases
33
What happens when
the price decreases for
a good that has a
complement?
The demand curve for
the substitute good
increases
35
34
What does an inverse
relationship between
price & quantity mean?
It means that the two
move in opposite
directions
36
6
What is the
law of supply?
The principle that there is
a direct relationship
between the price of a
good and the quantity
sellers are willing to offer
for sale in a defined time
period, ceteris paribus
Why do supply curves
have a positive slope?
Only at a higher price will it
be profitable for sellers to
incur the higher opportunity
cost associated with
supplying a larger quantity
37
A company’s
Curve for
P Supply
Compact Discs
Supply Curve
A
$20
$15
A
B
C
C
$5
10
20
30
An Individual Seller’s Supply for Compact Discs
Point
B
$10
38
40
Q
39
Price
$20
10
6
Quantity
40
30
20
40
What is a market?
What is market supply?
Any arrangement in
which buyers and
sellers interact to
determine the price and
quantity of goods and
services exchanged
The horizontal summation of
all the quantities supplied at
various prices that might
prevail in the market
41
42
7
Market Supply Schedule for Compact Discs
Price
$25
$20
$15
$10
$5
Super Sound
High Vibes
Total
25 + 35 =
20
30
15
25
10
20
5
15
60
50
40
30
20
P
High Vibes Supply Curve
$15
$10
10 15
P
S2
$25
$20
S1
$25
$20
43
P
Super Sound Supply Curve
30 35
Q
45
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
SUPPLIED AND A
CHANGE IN SUPPLY
47
44
S total
$15
$10
20 25
Q
Market Supply Curve
$25
$20
$15
$10
20 25
40 45
55 60
Q
46
When price changes,
what happens?
The curve does not shift
- there is a change in
the quantity supplied
48
8
A change in price
a change
P causes
in the quantity
$20
Supply Curve
A
supplied
$15
Change in
Quantity
Supplied
B
$10
C
Change in
Price
$5
10
20
30
40
Q
49
When something
changes other than
price, what happens?
The whole curve shifts there is a change in supply
51
50
P
$20
When the ceteris paribus
assumption is relaxed, the
whole curve can shift
S1
$15
S2
$10
$5
10
20
30
40
Q
52
What can cause a
supply curve to shift?
A change in:
Change in
supply
Change in
nonprice
determinant
53
1. Number of sellers in the market
2. Technology
3. Resource prices
4. Taxes and subsidies
5. Expectations of producers
6. Prices of other goods the firm
could produce
54
9
Where is the
equilibrium price?
What is the
equilibrium price?
At the price where the
quantity demanded and
the quantity supplied
are equal
The price towards which
the economy tends
55
The Supply & Demand
for Tennis Shoes
P
$120
$90
S
Surplus
$60
$30
Shortage
D
1,000 2,000 3,000 4,000
Q
57
56
What is the
price system?
A mechanism that uses
the forces of supply
and demand to create
an equilibrium through
rising and falling prices
58
The law of demand states there is
an inverse relationship between
the price and the quantity
demanded, ceteris paribus. A
market demand curve is the
horizontal summation of individual
demand curves.
Summary
59
60
10
Individual ’s Demand Curve for Compact Discs
P
$20
$15
Individuals Buyer’s Demand Schedule for Compact Discs
A
Point
B
C
$10
A
B
$20
$15
4
6
C
D
$10
$5
10
16
D
Demand Curve
4
$20
$15
Quantity demanded
(per year)
7
$5
P
Price
per compact disk
8
12 16
Q
61
When the ceteris paribus assumption
is relaxed, the whole curve can shift
A
$10
$5
10 20
A change in quantity demanded is a
movement along a stationary
demand curve caused by a change
in price. When any of the nonprice
determinants of demand changes,
the demand curve responds by
shifting. An increase in demand
(rightward shift) or a decrease in
demand (leftward shift) is caused
by a change in one of the nonprice
determinants.
62
Nonprice determinants of demand:
a. the number of buyers,
b. tastes and preferences.
B
D2
D1
Q
30 40 50
63
The law of supply states there is a
direst relationship between the
price and the quantity supplied,
ceteris paribus. The market supply
curve is the horizontal summation
of individual supply curves.
65
c. income (normal and inferior).
d. expectations of future p;rice and
income changes, and
e. prices of related goods
(substitutes and complements)
64
A change in quantity supplied is a
movement along a stationary
supply curve caused by a change in
price. When any of the nonprice
determinants of supply changes,
the supply curve responds by
shifting. An increase in supply
(rightward shift) or a decrease in
supply (leftward shift) is caused by
a change in one of the nonprice
determinants.
66
11
A company’s
Curve for
P Supply
Compact Discs
Supply Curve
A
$20
$15
$20
curve can shift
S1 S2
$15
B
$10
When the ceteris
assumption
P isparibus
relaxed, the whole
$10
C
$5
$5
10
20
30
40
Q
10
67
Nonprice determinants of supply:
a. the number of sellers.
b. technology
c. resource prices.
d. taxes and subsidies.
e. expectations of future price changes,
f. prices of other goods.
20
30
40
Q
A surplus or shortage exists at any
price where the quantity
demanded and the quantity
supplied are not equal. When the
price of a good is greater than the
equilibrium price, there is an
excess quantity supplied called a
surplus. When the price is less
than the equilibrium price, there is
an excess quantity demanded
called a shortage.
69
Equilibrium is the unique price and
quantity established at the
intersection of the supply and the
demand curves. Only at
equilibrium does quantity
demanded equal quantity
supplied.
71
68
70
The Supply & Demand
for Tennis Shoes
P
$120
$90
S
Surplus
$60
$30
Shortage
D
1,000 2,000 3,000 4,000
Q
72
12
The price system is the supply and
demand mechanism that
establishes equilibrium through the
ability of prices to rise or fall.
73
13