Economics Notes

Demand

• Indicates how much product consumers are both willing and able to buy at each possible price during a given period, with others remaining constant.

The Demand Curve

The demand curve is the demand schedule plotted on a graph. It allows you to see the more “in-between” prices on the demand schedule.

Shifting the demand curve

• When something other than the price changes, the whole curve will shift. These are affected by the determinants of demand which can also be called non-price factors

• For example, if Beyonce wears a pair of shoes for a known event, then the whole curve will shift because the price is not changing, but instead the whole curve.

Law of Demand

Definition

• The quantity demanded varies inversely with price; other things are constant. Thus, the higher the price, the smaller the quantity demanded; and vise versa.

Substitution effect

• The change in the relative price (the price of one good relative to the prices of other goods) causes the substitution effect.

• If all prices changed by the same margin, there would be no substitution effect.

• For example: if it were a hot day and you wanted a cold glass of orange juice, but suddenly! the orange juice prices jumped up, then you would rather buy another type of juice like apple or pineapple juice if means it will save you more money by substituting the kind of juice your buying.

Income effect

• Money Income: The number of dollars you receive per period.

• Real Income: measure in terms of how many goods and services you can buy.

• For example; if your money income increases while the prices of goods and services remain constant, your real income also increases, allowing you to purchase more items than before.

Diminishing marginal utility

• Marginal utility: additional satisfaction you derive from each item

• Law of marginal utility: the satisfaction you derive from each additional item consumed decreases as your consumption increases.

• For example; consuming one slice of pizza may provide high satisfaction, but the second slice will likely bring less satisfaction, and by the time you reach the third or fourth slice, the enjoyment may significantly diminish.

Demand schedule

A chart that shows the price and the quantity demanded.

The difference between Demand and Quantity Demanded

Quantity demanded is at the individual/specific price while demand is the all-over price. The demand on a graph can be seen as the whole curve/line which includes each and every price, while QD is a specific point on said graph.

Demand elasticity

Demand elasticity measures how responsive the quantity demanded of a good is to changes in price. It reflects how much consumers change the quantity demanded when the price of the goods changes. If demand is elastic, a small change in price results in a larger change in quantity demanded. Conversely, if demand is inelastic, a change in price leads to a proportionally smaller change in quantity demanded.

Determinants of Demand elasticity

• Availability of substitutes: The greater the availability of substitutes for a good, the greater the goods elasticity of demand.

• Share of consumer’s budget spent on the good: Increase in prices reduced the demand because people are not both willing and able to purchase at higher prices

• A matter of time: The longer the adjustment period, the greater the consumer’s ability to substitute

• Some elasticity estimates: Demand elasticity is greater in the long run because consumers have more time to adjust.

Other Determinants of Demand

• Consumer Income:

• The Prices of Related Goods: There are 2 types of related goods

  • A substitute good: If the price of chicken goes down, then the demand curve for burgers will shift left because more people want to buy chicken.

  • A compliment good: If the price of burger buns goes down, then the who

  • le demand curve for burgers will shift right because the buns are complimentary goods alongside the burgers.

• The number and Composition of Consumers:

• Consumer Expectations:

• Consumer Tastes:

Supply

Supply refers to the various quantities of a good or service that producers are willing to sell at all market prices.

Supply can refer to the output of one producer or to the total output of all producers in the market. (market supply)

Unlike demand, there is a direct relationship between supply and prices