Competitive Markets
&
Demand
Unit 2 - Lesson 1
Learning outcomes:
● Define all terms in orange in Tragakes textbook
● Outline the meaning of a competitive market
● Explain the Law of Demand
● Draw a demand curve
● Explain the relationship between individual and market demand
● Analyse the non-price determinants of demand as causes of demand curve
shifts.
● Use diagrams to distinguish between a shift in demand and a movement
along the demand curve
● Explain the assumptions that underlie the Law of Demand
Outline the meaning of a competitive market
● Composed of a large number of sellers & buyers
● Act independently so no individual seller has the ability to control the price
● Price of product is determined by the interactions of many sellers/buyers
Explain the Law of Demand
● Individual demand represents
the various quantities of a good
or service an individual
consumer is willing and able to
buy at various price levels
during a particular period of
time - ceteris paribus.
● Demand schedule - a table
listing the quantity demanded at
various price levels.
Explain the Law of Demand
● The information in the Demand
Schedule can be plotted on a
graph.
● Axes are labeled -
○ Price (Vertical)
○ Quantity (Horizontal)
Explain the Law of Demand
Law of Demand
● There is a negative causal
relationship between price and
quantity demanded.
● As Price increase the Quantity
Demanded of the good or service
decreases.
● As Price decreases the Quantity
Demanded of the good or service
increases.
As the price of chocolate bars decreases from $5 to $4 the quantity demanded
of chocolate bars increases from 2 to 4 chocolate bars.
Explain the relationship between individual and market demand
Individual Demand: represents the various quantities of a good or service an
individual consumer is willing and able to buy at various price levels during a
particular period of time - ceteris paribus.
Market Demand: Sum of all Individual demands for the good or service.
Analyse the non-price determinants of demand as causes of demand
curve shifts.
Non-price Determinants of Demand:
variables other than price that cause
Demand for a good or service to increase
or decrease.
● Increase in Demand
○ Rightward shift from D1 - D2
○ Price remains constant
○ Increase in Quantity from Q1 - Q2
● Decrease in Demand
○ Leftward shift from D1 - D3
○ Price remains constant
○ Decrease in Quantity from Q1 - Q3
Analyse the non-price determinants of demand as causes of demand
curve shifts.
Income in the case of Normal Goods: Income in the case of Inferior Goods:
● An increase in income leads to an ● An increase in income leads to a
increase in demand (rightward shift) decrease in demand (leftward shift)
● A decrease in income leads to a ● A decrease in income leads to an
decrease in demand (leftward shift) increase in demand (rightward shift)
Therefore there is a direct relationship Therefore there is an indirect
between Income and Demand for relationship between Income and
Normal Goods. Demand for Inferior Goods.
Analyse the non-price determinants of demand as causes of
demand curve shifts.
Tastes and Preferences:
● If preferences and tastes for a good
or service become more favorable
○ Demand will increase
○ Right shift in Demand from D1 - D2.
○ Price levels remain constant
● If preferences and tastes for a good
or service decrease
○ Demand will decrease
○ Left shift in Demand from D1 - D3
○ Price level remains constant
Analyse the non-price determinants of demand as causes of demand
curve shifts.
Price of Related Goods:
● Substitute Goods: goods that
fulfill the a similar need
○ Example: Coke and Pepsi
● Complementary Goods: goods
that tend to be used together.
○ Tennis racket and tennis
balls
○ Toothbrush and toothpaste
Analyse the non-price determinants of demand as causes of demand
curve shifts.
Substitute Goods:
● Increase in Price of Coke from P1 - P2 results in a decrease in Quantity
Demanded from Q1 - Q2
● Increase in Price of Coke results in an increase in Demand of Pepsi from D - D1
There is a direct
relationship between
the change in price of
Good A (Coke) and the
change in Demand of
Good B (Pepsi)
Analyse the non-price determinants of demand as causes of demand
curve shifts.
Complementary Goods:
● An Increase in the price of Bread (A) from P1 - P2 results in a decrease in
Quantity Demanded from Q1 - Q2.
● The increase in the price of bread results in a decrease in Demand for Butter (B)
from D1 - D2
There is an indirect relationship
between a change in the price of
Good A (Bread) and the change
in Demand for Good B (Butter)
Use diagrams to distinguish between a shift in demand and a
movement along the demand curve
Movement along the Demand Curve
● A movement along the Demand Curve
is caused by a change in price.
○ A decrease in Price from P1 - P2
results in a movement along the
Demand Curve from Point A - Point
B.
○ Quantity Demanded increases
from Q1 - Q2
Use diagrams to distinguish between a shift in demand and a
movement along the demand curve
Shift in Demand Curve:
● Shift in Demand curve is the result
of a change in a non-price
determinant of Demand
● An increase in Demand results in
a right shift of Demand from D1 -
D2.
● Price levels remain constant
Explain the assumptions that underlie the Law of Demand
Law of Demand:
● There are three reasons that
support the the inverse
relationship between Price and
Quantity Demanded
○ Law of Diminishing Marginal
Utility
○ Income Effect
○ Substitution Effect
Explain the assumptions that underlie the Law of Demand
Law of Diminishing Marginal Utility
● Utility: the benefit an individual receives from consuming something
● Marginal: refers to the consumption of one additional unit
As consumption of a good or services increases, the additional utility (benefit)
a consumer receives decrease with each additional unit consumed.
This helps to explain the Law of Demand as it shows that a consumer is only
willing to buy an additional unit if the price falls.
Explain the assumptions that underlie the Law of Demand
Substitution Effect
As the price of a good falls, the consumer buys more of the less expensive good
therefore the Quantity Demanded for the good increases.
There is ALWAYS a negative causal relationship between Price and Quantity
Demanded for Substitute Goods.
Income Effect
As the price of a good falls, Consumers Real Income (Purchasing Power) has
increased therefore the Quantity Demanded will increase.
So as prices fall, Real Income increases. The decrease in price allows the
consumer to purchase more goods with the same amount of income.
