
Supply & Demand is really a theory on how
buyers and sellers interact with one another,
and how prices are determined


Organized or not, markets are a grouping of
buyers & sellers
We are going to assume in this chapter that
we have “competitive markets” meaning there
are many buyers & many sellers – each has a
very small impact on market price
Two characteristics:
1. Good being offered for sale are all the same
2. Buyers & sellers are so numerous no single
buyer can influence the market price


We’ll discuss other markets later such as
monopolies, oligopolies, etc…


Quantity Demanded = amount of a good that
buyers are willing and able to purchase
What is the biggest determinant of demand?


What is the relationship between price &
demand?
Law of Demand: Other things being equal,
the quantity demanded of a product is
negatively related to the price; if the price
rises, the quantity demanded falls
These are things that can shift Demand
1. Income
Normal Good vs. Inferior Good
2. Prices of Related Goods
Substitutes & Complements
3. Tastes
4. Future expectations

*** YOU MUST KNOW THESE ***
Market Demand is the sum of all individual
demands for a good/service
- They are summed horizontally


Fancy Latin term that means “other things
being equal”

Price changes cause a change in Quantity
Demanded while other determinants
(Income, Tastes, Related Goods,
Expectations) cause a change or shift in
Demand

Therefore, when price changes we move
along the demand curve, but other
determinants cause the entire curve to shift
at all prices
1.
2.
3.
4.
5.
The amount of a good willing to
be purchased at a given price 87%
The amount of a good willing to
be produced at a given price
The amount of a good willing to
be purchased if prices of that
good are kept constant
The amount of a good willing to
be purchased if income can vary
The relationship that exists
between price and demand at a
variety of purchases
1
4%
4%
2
3
4%
4
0%
5
1.
2.
3.
4.
5.
Price
Demand
Supply
Quantity
Elasticity
64%
36%
0%
1
2
3
0%
0%
4
5
1.
2.
3.
4.
5.
A change in the price of apples
grown in Washington state
A drastic reduction in the
incomes of people living in the
U.S.
An article in the NY Times
stating that an apple a day may
lead to cancer
A drastic increase in the
incomes of people living in the24%
U.S.
A hurricane that destroys all
apple orchards on the East
Coast
1
72%
0%
0%
2
3
4%
4
5
1.
2.
3.
4.
5.
An increase in the price of
marshmallows will decrease the
demand for this good
An increase in consumer incomes
will decrease the demand for this
good
A decrease in consumer incomes
will decrease the demand for this
good
An increase in consumer incomes
will increase the quantity
demanded of this good
A change in income will have no13%
effect on the demand or quantity
demanded of this good
1
83%
0%
2
3
0%
4
4%
5