Unit 2: Supply and Demand

Lesson 2.1: Demand

Market - A group of sellers and producers that exchange goods and services for payment
Perfectly competitive market: There are no individuals actions have a siginfacnt effect on the
price at which the good or service is sold.
The supply and model demand: a model of how a perfectly competitive market works
1.​ The demand curve - a set of factors that cause the demand curve to shift
2.​ The supply curve - a set of factors that cause the supply curve to shift
3.​ Market equilibrium - the equilibrium price and quantity. Change when the demand or
supply curve changes
Demand schedule: A table that shows how much of agood or service sotymers will want to buy
at different prices
The Demand Curve: A graphical representation of the demand schedule that shows the
relationship between the quantity demanded and the price.
The Law of Demand: When the price of a product increases, the quantity demanded
decreases.
The Substitution Effect:
Consumers respond to changes in the price of a good by switching to a substitute good. When the
price of a good increases, consumers will generally buy less of it and more of a substitute good
that is similar but cheaper. This is because the higher price makes the original good less
appealing relative to the substitute good. Conversely, when the price of a good decreases,
consumers will generally buy more of it and less of the substitute good, because the original
good is now more appealing relative to the substitute good. For example, when chocolate got
more expensive, you may substitute away from chocolate and towards mints.

The Income Effect

: Changes in the price of a good affect a consumer's purchasing power. When the price of a
good increases, a consumer's purchasing power decreases because they can buy less of the good
with the same amount of income. This means that they will likely buy less of the good and more
of other, cheaper goods to make their income stretch further. Conversely, when the price of a
good decreases, a consumer's purchasing power increases because they can now buy more of the
good with the same amount of income. This means that they will likely buy more of the good
and less of the other, more expensive goods.

The Law of Diminishing Marginal Utility:

The additional satisfaction that a person gets from consuming a good decreases as they consume
more of it. This means that the first unit of a good will typically provide more satisfaction than
the second, the second more than the third, and so on. This is because, as people consume more
of a good, they become less and less hungry or thirsty, for example, and therefore get less
satisfaction from each additional unit of the good. As price increases, the costs associated with
consumption increase, and thus it takes fewer units to reach where MB = MC.

Change in Demand: The increase in quantity demanded at any given price, the shift in position
od the demand curve.
Movement along the demand curve: The change in the quantity demanded of a good that results
from a change in a good's price.
Quantity demanded refers to the specific amount of a good or service that a consumer is willing
to buy at a given price, at a specific point in time. Quantity demanded is a point on the demand
curve and is affected by factors such as price, income, and the prices of substitute and
complementary goods.

Shifting Demand

When certain events happen outside of the market, the quantity demanded can change for every
single price point. This is visually represented as a shift in the demand curve either right to
indicate an increase in demand, or left to indicate a decrease in demand. The main shifters, or
determinants of demand, can be remembered using the acronym I-N-S-E-C-T.

Income: Changes in a consumer's income can affect their demand for certain goods or services.
For example, if a consumer's income increases, they may have more disposable income to spend
on higher-priced or luxury goods, leading to an increase in demand. Conversely, if a consumer's
income decreases, they may be more inclined to switch to cheaper alternatives, leading to a
decrease in demand for the original good or service.

Number of Consumers: The number of consumers in a market can also affect demand. If the
population or the number of potential consumers in a market increases, demand may also
increase. Conversely, if the number of consumers decreases, demand may also decrease.

Substitute: The availability of substitute goods or services can also affect demand. If a substitute
good or service becomes more widely available or attractive, demand for the original good or
service may decrease, as consumers switch to the substitute.

Expectation: Expectations about the future can also affect demand. If consumers expect the
price of a good or service to increase in the future, they may be more inclined to buy it now,
leading to an increase in demand. Conversely, if consumers expect the price to decrease in the
future, they may be more inclined to wait, leading to a decrease in demand.

Complement: The demand for a good or service can also be influenced by the availability of
complementary goods or services. For example, if the demand for a particular type of car
increases, the demand for car tires may also increase, as tires are a complementary good for cars.

Taste: Changes in consumer tastes and preferences can also affect demand. If a good or service
becomes more popular or fashionable, demand may increase. Conversely, if a good or service
becomes less popular or fashionable, demand may decrease.

●​ When price level increases, the quantity of a good demanded decreases.

Determinants are factors that can cause the entire demand curve to increase or decrease. When
there is an increase in demand (see graph below), the demand curve will shift right. When at
every price level, there is an increase in the quantity demanded. When there is a decrease in
demand (see graph below), the demand curve will shift left. At every price level, there is a
decrease in quantity demanded.

Normal goods: When a rises in income, the demand for them increases
Inferior goods: When the demand for some goods decrease when incomes rise, less desirable

Individual demand curve: The relationship between quantity demanded and price for an
individual consumer