Demand and Supply

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Demand and Supply

• Constance Wehner

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microeconomics

• Behavior and decision-making of individuals,
  households and businesses

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demand

• desire
• willingness and
• ability to pay

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Law of Demand the quantity demanded (of a good
or service) varies inversely with its price.
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Representing demand

• A table of quantities demanded at a variety of
  prices is a demand schedule
• Information from a demand schedule is shown on a
  demand curve
• Demand curve is always downward sloping
  (negative)
• Demand curves can be for an individual or a market

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Demand schedule curve
Price Quantity demanded
5 10
4 17
3 26
2 38
1 53
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Demand marginal utility

• (utility means usefulness)
• marginal utility extra satisfaction a person
  gets from one more unit of a product
• Diminishing marginal utility extra satisfaction
  from using additional quantities of a product
  begins to diminish
• This will affect the qty demanded

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A change in quantity demanded always causes
movement along the (original) demand curve
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Causes of change in QTY demanded Income effect

• When prices drop people are relatively
  richer, they can buy more of a good
• When prices rise people are relatively poorer
  they cannot buy as much
• There will be a change in quantity demanded in
  each case

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Causes of change in QTY demanded Substitution
effect

• Consumers tend to replace a more costly item with
  a relatively less expensive item
• Good substitutes reduce quantity of more
  expensive goods demanded

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Demand elasticity extent to which a price change
causes a change in qty demanded.

• elastic demand if price change brings relatively
  larger change in qty demanded
• inelastic demand results in relatively small
  change in demand qty when price changes
• Proportional change in qty demanded to price
  change is unit elastic

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Elasticity profits

• Inelastic products produce increased revenue with
  price increases
• Elastic products will have reduced revenues with
  price increases
• Price reductions for elastic products give
  increased revenues

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Determinants of elasticity

• Can purchase be delayed?
• Adequate substitutes available?
• Does purchase use a large portion of income?

• where epsilon is the price elasticity, P is the
  price of the good, and Q is the quantity demanded
  for the good

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Change in Demand (at all prices)

• Entire demand curve moves
• Mvt to right is an increase in demand
• Mvt to left is a decrease in demand
• Change in demand of multiple people is a shift of
  the market demand curve

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Change in demand

• People buy different quantities of a good at the
  same price b/c of
• Income changes
• consumer tastes
• substitutes
• complements
• changed expectations
• of consumers

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A DIRECT RELATIONSHIP price
and supply provided
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