SECTION 2 – DEMAND AND
SUPPLY
By:J.A.SACCO
Demand
What is meant by demand and supply?
• What are the basic elements that determine the price of
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anything?
How are prices determined by the seller?
What influence do you have on the determination of
price?
Why can you buy many things at a lower price in a
supermarket than in a local general store?
You all have had experience as a buyer---- Have you had
experience as a seller? How are the goals different?
Why?
DEMAND
Quantity demanded
•The amount of a good, service, or resource that people or a group
are willing and able to purchase at various prices during a specified
point in time all other things being constant
DEMAND
• Law of Demand
• Other things remaining the same,
• If the price of the good/service rises, the quantity demanded of that good
decreases.
• If the price of the good/service falls, the quantity demanded of that good
increases.
Why is there an inverse relationship between price and the quantity demanded?
Demand
• There are THREE economic concepts that explain the
Law of Demand and these concepts account for the
inverse relationship that changes in the price of
goods/services have on the quantity demanded:
• Income/ Purchasing Power Effect
• Substitution Effect
• Diminishing Marginal Utility
Income/Purchasing Power Effect
• Amount of money a person has to spend on
goods/services called purchasing power.
• It is not a change in a person’s income but a change in
purchasing power (real income) because of a change in
the good/service.
Pr.
Pur.Pwr.
QD
Pr.
Pur.Pwr.
QD
Substitution Effect
• To substitute a lower priced product/service (generic) for a
normal product/service that is more expensive.
Price A (NORMAL)
If there is a substitute than the quantity
demanded of that normal good will decrease.
QD
What happens if there is not a substitute?
Diminishing Marginal Utility
• What is UTILITY?
• The usefulness of a good/service or the satisfaction one
gets from that good/service.
D.M.U
.
• As the price of a good/service decreases, the quantity
demanded increases, but for each successive decrease in
price, the quantity demanded will increase but at a smaller
rate.
• You will get to a point where the quantity demanded will
reach zero- at that point you have no more utility for that
good/service.
Diminishing Marginal Utility
Diminishing Marginal Utility
Demand Schedule and Demand Curve
• Now that we know why there is an inverse relationship
between price and quantity demanded, lets look at an
economic model of the law of demand.
DEMAND
Demand schedule
This is a numerical representation of the inverse
relationship between specific relative prices and
quantity demanded.
Demand curve
This is a graphic representation of the demand
schedule. A negatively sloped line showing the inverse
relationship between relative price and quantity
demanded.
DEMAND
DEMAND
•Individual Demand and Market Demand
•Market demand
•The sum of the demands of all the buyers in a
market.
•The market demand curve is the horizontal
sum of the demand curves of all buyers in the
market.
•The greater number of individuals in a market
demand curve the more accurate the curve.
DEMAND
A Change in Demand
Review- Change in the Quantity of Demand
A CHANGE IN PRICE!
Income Effect
Substitution Effect Diminishing Marginal
Utility
*Just a SNAPSHOT- ONLY PRICE MATTERS- Ceteris Paribus
A Change in Demand
• Change in demand
• A change in the quantity that people plan to buy when any
influence other than the price of the good changes.
• A change in demand means that there is a new demand
schedule and a new demand curve.
• This shift in the demand curve causes an overall change in the
level (quantity) of demand at each and every price.
Change in Demand
Figure shows
changes in demand.
1. When demand
decreases, the
demand curve shifts
leftward from D0 to D1.
2. When demand
increases, the demand
curve shifts rightward
from D0 to D2.
Change in Demand
There are many influences that effect the change in
demand. These influences are called NON- PRICE
DETERMINANTS of DEMAND.
Non-Price Determinants of Demand
Consumer Taste and Preferences
When taste/preferences change, the demand for one item increases
and the demand for another item (or items) decreases.
 Seasonal
 Style
 Fads
 Location
 Age
Non-Price Determinants of Demand
Market Size
 Population- Pop. increases/demand increases. Pop.
Decreases/demand decreases.
 Technology- Must have it!
 Advertisement
 Gov’t Decisions- Gov’t involvement in other countries
shrinks/expands market– embargo, tariffs
 Social/Economic Changes
Non-Price Determinants of Demand
Change in Income
This is an ACTUAL change in your income! Not the
Income Effect!!
Normal good (Beef steak)
• A good for which the demand increases if
income increases and demand decreases
if income decreases.
Inferior good (Beef hot dogs)- not a substitute!
• A good for which the demand decreases if income
increases and demand increases if income
decreases.
Non-Price Determinants of Demand
Change in Consumer Expectations
Expected Future Income?
Expected Future Price of Good/Service?
Expected Good/Service Availability?
Non-Price Determinants of Demand
Prices of Related Goods
Substitute (not generics)
A good that can be consumed in place of another good.
For example, Coca Cola and Pepsi Cola.
The demand for a good increases, if the price of one of its substitutes
rises.
The demand for a good decreases, if the price of one of its substitutes
falls.
Non-Price Determinants of Demand
Complements
A good that is consumed with another good.
For example, peanut butter and jelly.
The demand for a good increases, if the price of
one of its complements falls.
The demand for a good decreases, if the price of
one of its complements rises.
Non-Price Determinants of Demand
Change in Quantity Demand vs. Change in Demand
Change in Quantity Demanded Versus Change in Demand
• Change in the quantity demanded
• A change in the quantity of a good that people plan to buy that
results from a change in the price of the good.
• (move up and down the demand curve)
• Change in demand
• A change in the quantity that people plan to buy when any
influence other than the price of the good changes.
• (Shift of the demand curve)
Change in Quantity Demand vs. Change in Demand
Class Questions
• For the following graph each demand situation. Include
the reason for the change in the graph. LABEL
EVERYTHING!
• 1) Received $2000 tax refund--- Demand for a new digital camera.
• 2) Price of jelly increases by 25 cents--- Demand for peanut butter
• 3) NY Rangers win the Stanley Cup---- Demand for NY Ranger tee•
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shirts
4) Price of a NY Jets ticket from $60-$70---- Demand for a NY Jets
ticket
5) Population of the U.S. increases---- Demand for inexpensive
housing
6) Price of Wise potato chips decreases---- Demand for Lays chips
7) New CD’s the size of a quarter---- Demand of old CD’s
Class Questions
• 8) Just been fired from your job--- Demand for a new I•
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Phone
9) Buy one hat get every additional hat at 50% off--Demand for hats
10) Price of gasoline increases---- Demand for large cars
11) Nike sneakers used by Olympic athletes--- Demand
for Nike sneakers
12) Price of Intel computer chip---- Demand for AMD
computer chip