2.1 Demand and supply curves

Effective demand

Refers to the willingness and ability of consumers to purchase goods at different prices, reflecting what consumers are actually buying.

Law of demand

States that there is an inverse relationship between price and quantity demanded; when price falls, quantity demanded rises, and vice versa.

Demand curve

Graphical representation of the relationship between the price of a good and the quantity demanded.

Individual demand

The relationship between the price of a good and the quantity demanded by one person.

Market demand

The relationship between the price of a good and the quantity demanded by all consumers in a market, shown as the horizontal sum of individual demand curves.

Shift in demand curve

Occurs when demand changes due to a non-price determinant, resulting in a new quantity demanded at every price.

Determinants of demand

Factors such as tastes and preferences, prices of substitutes and complements, income levels, population changes, and consumer expectations that influence consumer demand.

Substitutes

Goods consumed in place of one another; a rise in the price of one leads to an increase in demand for the other.

Complements

Goods consumed in conjunction with one another; a fall in the price of one leads to an increase in demand for both.

Normal goods

Goods whose demand increases as consumer income rises.

Inferior goods

Goods whose demand decreases as consumer income rises.

Supply

The quantity of a good that firms are willing and able to sell at each price over a given time period.

Law of supply

States that there is a direct relationship between price and quantity supplied; higher prices lead to a higher quantity supplied.

Shift in supply curve

Occurs when supply changes due to a non-price determinant, resulting in a new quantity supplied at every price.

Cost of production (COP)

The total cost incurred by a firm in producing a good, which can influence supply.

Hoarding behavior

Occurs when firms expect prices to rise, leading them to withhold supply to sell at a higher future price.

Profitability of substitutes in supply

When demand for one product increases, producers may switch to that product, decreasing the supply of its substitute.

Market supply

The horizontal sum of all individual supply curves in a market.

Movement along supply curve

Occurs when a change in the price of a good leads to a change in the quantity supplied, shown as a movement along the curve.

Expectations of price changes

When consumers or firms anticipate future price changes and adjust their current demand or supply accordingly.