Supply And Demand Economics Notes

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Lecture 3

Chapter 3: Supply and Demand

Markets bring buyers and sellers together so they can interact and transact with each other. There are two sides to each market: the demand side and the supply side.

Prices communicate a lot of information. Our market economy is called the price system.

Demand

Demand = the maximum amount of a good or service that buyers are willing and able to offer to buy at each and every price during a specific time period, ceteris paribus

Here is a demand curve. Notice that each price is associated with a different quantity demanded.

Price of this good

P1

P2 Demand

Q1 Q2 Quantity demanded of this good

If the price of this good changes then the “quantity demanded” of this good will also change, but nothing will happen to the “demand” for this good.

The Law of Demand: Ceteris paribus, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises. (This is because people will substitute towards relatively cheaper products.)

When the price of this good changes we slide along the existing demand curve—notice that demand doesn’t change.

Determinants of Demand: Ceteris paribus, when a determinant of demand changes, the position of the demand curve shifts. This is called a change in demand.

The determinants of demand are listed in columns 3 and 4 below: Your job is to learn to define and show on a graph (1) an increase in demand, (2) a decrease in demand, (3) an increase in quantity demanded, and (4) a decrease in quantity demanded. You have to learn to identify the things that cause (1) an increase in demand, (2) a decrease in demand, (3) an increase in quantity demanded, and a (4) decrease in quantity demanded:

An increase in quantity demanded is caused by a decrease in the price of the good in the current market period A decrease in quantity demanded is caused by an increase in the price of the good in the current market period An increase in demand is caused by one of the following: A decrease in demand is caused by one of the following: An increase in the number of buyers

An increase in tastes or preferences

An increase in the price of a substitute good A decrease in the price of a complementary good

A change in consumer expectations about future conditions that cause them to want to buy more today

An increase in income if this is a normal good or
A decrease in income if this is an inferior good A decrease in the number of buyers

A decrease in tastes or preferences

A decrease in the price of a substitute good

An increase in the price of a complementary good

A change in consumer expectations about future conditions that cause them to want to buy less today

A decrease in income if this is a normal good or
An increase in income if this is an inferior good

Supply

Supply = the maximum amount of a good or service that sellers are willing and able to offer to provide at each and every price during a specific time period, ceteris paribus

Here is a supply curve. Notice that each price is associated with a different quantity supplied.

Price of this good Supply

P2

P1

Q1 Q2 Quantity supplied of this good

If the price of this good changes then the “quantity supplied” of this good will also change, but nothing will happen to the “supply” for this good.

The Law of Supply: Ceteris paribus, as price increases, quantity supplied rises, and as price decreases, quantity supplied falls. (This is because the higher the price, the greater the potential for higher profits and thus the greater the incentive for firms to produce and sell more products.)

When the price of this good changes we slide along the existing supply curve—notice that supply doesn’t change.

Determinants
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