DnS – 1 of 3 – LECTURE – DEMAND (1)

Hand Sanitizer Demand and Supply

• Overview of demand and supply dynamics in a market context.

Chapter Objectives

• After studying this chapter, you will be able to:

  • Describe a competitive market and consider price as an opportunity cost.

  • Explain the influences on demand and supply.

  • Discuss how demand and supply determine prices and quantities bought and sold.

  • Use the demand and supply model to predict changes in prices and quantities.

Markets and Prices

• Definition of a Market:

  • An arrangement that enables buyers and sellers to exchange information and transact business.

• Competitive Market:

  • Characterized by many buyers and sellers, preventing any single buyer or seller from influencing the price.

• Money Price:

  • The monetary amount needed to purchase a good.

• Relative Price:

  • The ratio of a good's money price to the price of the next best alternative good, representing the opportunity cost.

Demand

• Definition of Demand:

  • Demand represents the desire and ability of consumers to purchase goods and services.

  • To demand something, one must:

    1. Want it

    2. Be able to afford it

    3. Have made a definite plan to buy it.

• Quantity Demanded:

  • The amount that consumers plan to buy during a specified period and at a particular price.

Demand Curve and Schedule

• Demand Curve:

  • Illustrates the relationship between the price of a good and quantity demanded of that good when all other buying influences are constant.

• Demand Schedule:

  • A table that displays the quantity demanded at various price levels.

Law of Demand

• Law of Demand:

  • States that, assuming all other factors are constant:

    • Higher prices lead to lower quantities demanded.

    • Lower prices lead to higher quantities demanded.

• Reasons for Change in Quantity Demanded:

  • Substitution Effect: When prices rise, consumers seek substitute goods, decreasing quantity demanded.

  • Income Effect: Rising prices reduce consumer purchasing power, decreasing quantity demanded.

Change in Quantity Demanded

• A change in price results in movement along the demand curve.

  • Rising prices decrease quantity demanded, leading to movement up the demand curve.

  • Falling prices increase quantity demanded, leading to movement down the demand curve.

Willingness and Ability to Pay

• The demand curve reflects willingness and ability to pay.

  • As the quantity available decreases, the price someone is willing to pay for additional units increases, measuring Marginal Benefit.

Change in Demand

• A change in demand occurs when factors other than price influence buying plans, shifting the entire demand curve.

  • When demand increases, the curve shifts rightwards; when it decreases, it shifts leftwards.

Factors Influencing Demand

• Six Main Factors:

  • Prices of related goods

  • Expected future prices

  • Consumer incomes

  • Expected future income and credit availability

  • Population size

  • Preferences and consumer tastes.

Population Growth

• An increase in population typically results in greater demand for all goods.

Preferences

• Different consumer preferences can lead to differing demand patterns among individuals with the same income.

Expected Future Prices

• If consumers expect prices to rise in the future, current demand increases, shifting the demand curve to the right.

Prices of Related Goods

• Substitutes: Goods that can be used instead of another. For example, if the price of coffee rises, the demand for tea may increase.

• Complements: Goods that are used together. For example, if the price of milk rises, the demand for cookies may decrease.

Normal and Inferior Goods

• Normal Goods: Demand increases with rising income, shifting the demand curve rightward.

• Inferior Goods: Demand decreases when income rises, shifting the demand curve leftward.

Future Income Expectations

• Anticipated increases in future income or easier credit can boost current demand.

Summary of Demand Changes

• Change in Quantity Demanded: Shift along the demand curve with price changes.

• Change in Demand: A shift of the demand curve when other buying influences change, regardless of price.