Demand and Consumer Choice

Demand and Consumer Choice: Econ 1001 Study Notes

Agenda Details

• Definitions: Demand, Supply, Markets

• Demand

  • Law of Demand

  • Individual vs Market Demand

  • Demand Factors

  • Movements Along vs Shifts in Demand

• Supply

  • Law of Supply

  • Individual vs Market Supply

  • Supply Factors

  • Movements Along vs Shifts in Supply

• Market Equilibrium

Markets: Supply and Demand

• Market Definition:

  • A market is defined as a group of buyers and sellers of a particular good or service.

• Role of Buyers:

  • Buyers are the determinants of demand.

• Role of Sellers:

  • Sellers are the determinants of supply.

• Market Equilibrium Condition:

  • The interactions between buyers and sellers determine the market equilibrium which sets the price and quantity to be traded in the market.

Demand

• Definition of Demand:

  • Demand represents the quantity that buyers are willing and able to purchase at every possible price.

Law of Demand

• Definition:

  • The law of demand states that the quantity demanded falls as the price increases, all else equal (ceteris paribus).

• Individual Demand Curve Exploration:

  • Focus on individual demand curves to analyze how many units you are willing to buy at different prices.

Demand Schedule and Curve

• Demand Schedule:

  • A table that represents the relationship between price and quantity demanded.

• Demand Curve:

  • Visual representation of the demand schedule, illustrating the law of demand with a negative slope.

• Inverse Demand:

  • Involves analyzing the relationship where price is a function of quantity demanded.

Market Demand vs Individual Demand

• Market Demand Definition:

  • Market demand is the sum of all individual demands for a particular good. Graphically, this is represented as a horizontal sum of individual demand curves.

• Estimating Market Demand:

  • Step 1: Run a survey to collect multiple individual demands.

  • Step 2: For each price, calculate the total quantity demanded by all customers.

  • Step 3: Scale the quantities obtained in the survey to represent the total market (acknowledging a survey is just a subset).

  • Step 4: Draw the market demand curve based on the aggregated data.

Factors That Determine Demand

• Demand Curve Influences:

  • The shape and position of the demand curve are influenced by:

  • The good’s own price

  • Consumers’ tastes or preferences

  • Consumers’ income:

    • Normal Goods:

    • Goods for which demand increases as income increases.

    • Inferior Goods:

    • Goods for which demand decreases as income increases.

  • Prices of Related Goods:

    • Complements:

    • Goods that are consumed together; an increase in the price of a complement typically decreases demand.

    • Substitutes:

    • Goods that can replace each other; an increase in the price of a substitute increases demand.

  • Number of Buyers:

    • More buyers generally lead to higher demand.

  • Expectations:

    • Expected changes in future prices can also affect current demand.

Movement Along the Demand Curve

• Price Change Effects:

  • A change in the price of a good leads to a movement along the demand curve (not a change in demand).

  • Quantity Demanded Increase:

  • If the price decreases, the quantity demanded increases.

  • Key Note:

  • Demand itself does not increase; it is the quantity demanded that changes.

Shift of the Demand Curve

• Shift versus Movement:

  • A shift in the demand curve represents a change due to factors other than price.

• Increase in Demand:

  • Results in a rightward shift of the demand curve due to factors like:

  • Increase in consumer income (for normal goods).

  • Increase in the price of a substitute.

  • Decrease in the price of a complement.

• Decrease in Demand:

  • Results in a leftward shift of the demand curve due to factors like:

  • Decrease in consumer income (for normal goods).

  • Decrease in the price of a substitute.

  • Increase in the price of a complement.