DEMAND AND
SUPPLY
CHAPTER TWO
Focus Questions
What is demand?
What is the difference between demand and quantity
demanded?
Why do price and quantity demanded move in opposite
directions?
What is the difference between a demand schedule and a
demand curve?
When Demand Changes, the Curve Shifts
What Factors Cause Demand Curves to Shift?
What Is Demand?
A market is any place where people come together to buy and sell
goods or services.
Economists often say a market has two sides: a buying side and a selling side.
In economics, the buying side is referred to as demand, and the selling side
is referred to as supply.
The word demand has a specific meaning in economics. It refers to the
willingness and ability of buyers to purchase different quantities of a
good at different prices during a specific time period.
Willingness to purchase a good refers to a person’s want or desire for the
good.
Having the ability to purchase a good means having the money to pay for the
good.
Both willingness and ability to purchase must be present for demand to exist.
It is important for you to remember that if either one of these conditions is
absent, there is no demand.
What Does the Law of Demand “Say”?
Suppose the average price of a shirt rises from $10 to $15.
Will customers want to buy more or fewer of the shirt at
the higher price?
Most people would say that customers would buy
fewer shirt.
Now suppose the average price of a shirt falls from $10 to
$5.
Will customers want to buy more or fewer shirt at the
lower price? Most people would say more.
This law says that as the price of a good increases, the
quantity demanded of the good decreases.
The law of demand also says that as the price of
a good decreases, the quantity demanded of
the good increases.
In other words, price and quantity demanded
move in opposite directions (an inverse
relationship).
Quantity demanded is the number of units of a
good purchased at a specific price.
For example, suppose the price of meat is $5 a
item, and Yusuf buys two items. In this case two
items of meat is the quantity demanded of meat at
$5 a item.
The Law of Demand in Numbers and
Pictures
The law of demand can be
represented both in numbers and
pictures.
The economic term for this type
of numerical chart showing the
law of demand is demand
schedule.
If we connect all points, from A to
D which comes from demand
schedule, we have a line that
slopes downward from left to
right. This line, called a demand
curve.
demand curve is the graphic
representation of the law of
demand.
Individual Demand Curves and Market
Demand Curves
An individual demand curve and a market demand curve
are different.
An individual demand curve is the demand curve that
represents an individual’s demand.
For example, Harry’s demand curve represents Harry’s
demand for, say, shoes.
A market demand curve is simply the sum of all the
different individual demand curves added together.
When Demand Changes, the Curve
Shifts
Demand can go up, and it can go down.
For example, the demand for orange juice can rise or fall. The
demand for CDs can rise or fall.
Every time the demand changes for a good, any good, the
demand curve for that good shifts. By shift we mean that it
moves; it moves either to the right or to the left.
For example, if the demand for materials increases, the
demand curve for materials shifts to the right.
If the demand for materials decreases, the demand curve for
materials shifts to the left.
Demand increases →Demand curve shifts rightward
Demand decreases →Demand curve shifts leftward
What Factors Cause Demand Curves to
Shift?
These factors include: income, buyer preferences, prices of related
goods, number of buyers, and future price.
1) Income
As their income changes, people may buy more or less of a particular
good.
You might think that if income goes up, demand will go up, and if
income goes down, demand will go down.
Much of what happens depends on what goods are involved.
If a person’s income and demand change in the same direction (both
go up, or both go down), then the good is called a normal good.
If, however, income and demand go in different directions (one goes up,
while the other goes down), the good is called an inferior good.
If a person buys the same amount of the good when income changes,
the good is called a neutral good.
In economics, neutral goods refers either to goods whose demand is
independent of income , Examples of this prescription medicines.
2) Preferences
People’s preferences affect how much of a good they buy. A
change in preferences in favor of a good shifts the demand curve
to the right.
A change in preferences away from a good shifts the demand
curve to the left.
3) Prices of Related Goods
Demand for goods is affected by the prices of related goods.
The two types of related goods are substitutes and
complements.
When two goods are substitutes, the demand for one good
moves in the same direction as the price of the other good.
In other words, many people coffee is a substitute for tea.
Thus, if the price of coffee increases, the demand for tea increases
as people substitute tea for the higher-priced coffee.
Two goods are complements if they are consumed together. For example,
Books and Pens are used together to study.
With complementary goods, the demand for one moves in the opposite
direction as the price of the other.
4) Number of Buyers
The demand for a good in a particular market area is related to the number of
buyers in the area.
The more buyers, the higher the demand; the fewer buyers, the lower the
demand.
The number of buyers may increase because of a higher birthrate, increased
immigration, or the migration of people from one region of the country to
another.
Factors such as a higher death rate or the migration of people can also cause
the number of buyers to decrease.
5) Future Price
Buyers who expect the price of a good to be higher in the future may buy the
good now, thus increasing the current demand for the good.
Buyers who expect the price of a good to be lower in the future may wait until
the future to buy the good, thus decreasing the current demand for the good.
What Factor Causes a Change in Quantity
Demanded?
We identified the factors (income, preferences, etc.) that
can cause demand to change, but what factor can cause a
change in quantity demanded? Only one: price.
For example, the only thing that can cause customers to
change their quantity demanded of orange juice is a change
in the price of orange juice; the only thing that can cause a
change in the quantity demanded of fruits is a change in the
price of fruits.
So how do we represent a change in quantity demanded?
When quantity demanded changes, the curve doesn’t move
right or left.
Instead, the only movement is to a different point along a
given demand curve, which stays in the same place on the
graph.
END
