Demand, Market Structure, and Non-Price Determinants - Vocabulary flashcards
Demand, the Law of Demand, and Market Structure
In a free market economy without government intervention, there are many buyers and many sellers to ensure competition and prevent anyone from having market power.
Key market structure concepts introduced:
Perfect competition: many buyers and sellers, price takers, price set by overall market conditions.
Monopoly: one seller in the market.
Oligopoly: a few sellers who may undercut each other.
Monopolistic competition (often mis-stated in casual talk as product differentiation): many sellers with differentiated products.
Basic notational conventions:
Price is denoted by P (or sometimes p).
Quantity demanded is the amount buyers are willing to purchase at a given price.
The law of demand (concept): as the price of a good falls, the quantity demanded generally rises; as the price rises, the quantity demanded falls. This inverse relationship is the core idea behind the demand curve.
Important methodological caveat in economic modeling: the assumption of "other things constant" (ceteris paribus). When studying the relationship between price and quantity demanded, we hold all other determinants fixed and observe changes in price. If any non-price determinant changes, the entire demand curve can shift.
Four market structures mentioned as groundwork for later chapters:
Perfect competition
Monopoly
Oligopoly
Monopolistic competition (product differentiation)
The demand curve is drawn with:
Horizontal axis: Quantity demanded (Q)
Vertical axis: Price (P)
Demand schedules and curves:
A demand schedule lists the quantities demanded at all possible prices.
A demand curve is the graphical representation of that schedule, typically showing a downward-sloping relationship (positive price → lower quantity demanded).
Individual vs market demand:
Individual demand refers to one consumer’s quantities at various prices (e.g., Sofia’s demand for muffins).
Market demand is the horizontal sum of all individual demands in the market (e.g., Sofia + Diego).
To obtain market demand, add up each person’s quantity demanded at each price: if at price 1 the individual demands are 10 and 11, market quantity demanded at price 1 is 21.
Example build-out for an individual demand (Sofia):
At price $0, quantity demanded = 16
At price $1, quantity demanded = 14
At price $2, quantity demanded = 12
With a straight-line approximation, you can interpolate intermediate points like price $1.50 or $2.25 to estimate exact quantities
Movement along the same demand curve occurs when price changes (e.g., price moves from $1 to $3; this is a movement along the curve, i.e., a change in quantity demanded)
Key distinction:
Movement along the demand curve = change in quantity demanded due to a change in price alone (no shift of the curve).
A shift of the demand curve = a change in demand due to non-price determinants, so at every price, quantity demanded changes (the entire curve shifts left or right).
Memorization tips highlighted in the session:
Memorize the difference between quantity demanded (q_d) and demand (D).
Memorize the law of demand and the five demand shifters (non-price determinants) that cause shifts.
The five shifters determine how non-price determinants shift the entire demand curve, not the movement along the curve.
Market demand graph concept:
When more buyers enter the market (increase in the number of buyers), the market demand at every price increases, shifting the market demand curve to the right.
When the number of buyers decreases, market demand shifts to the left.
Income and the normal vs inferior goods concept:
Normal goods: demand increases when income increases.
Inferior goods: demand decreases when income increases.
Example given: frozen lasagna may be considered inferior for many consumers (store brands vs brand-name can serve as a proxy example).
The problem statement often indicates whether a good is normal or inferior; the effect of income on demand depends on that classification.
Five non-price determinants (demand shifters) with explanations and examples: 1) Number of buyers
More buyers -> higher demand at every price (shift right).
Fewer buyers -> lower demand (shift left).
Example: increasing the market size (your class + next class) increases market demand.
2) IncomeNormal goods: higher income -> higher demand (shift right).
Inferior goods: higher income -> lower demand (shift left).
Example: pizza is typically treated as a normal good in many problems; frozen donuts could be an inferior good depending on the scenario.
Tests or problems will specify whether a good is normal or inferior.
3) Prices of related goods (substitutes and complements)Substitutes: if the price of one good rises, demand for its substitute increases (shift right of the other good's demand). Example: if price of orange juice rises, the demand for apple juice increases (they’re substitutes).
Complements: if the price of a related good (complement) rises, demand for the other complement falls (shift left for the other good).
Example given: price increase in peanut butter reduces quantity demanded of jelly used in PB&J sandwiches; this is a shift in the jelly demand curve, not a movement along jelly’s own demand curve.
4) Tastes and preferencesChanges in preferences shift demand (e.g., new fashion, new information, or technological changes like MP3 players decreasing in appeal).
Example: a fad or new health claim could increase demand for a good; a long-ago gadget (MP3 players) loses demand as tastes shift away.
5) ExpectationsExpectations of future prices or income affect current demand.
If people expect prices to rise in the future, they may buy more now (rise in current demand).
If they expect their income to fall in the future, they may cut back and save more now (lower current demand).
How to apply the shifters in graphs (practical notes):
If the cause of a change is a price change of the good itself, you move along the demand curve (change in quantity demanded).
If the cause is any non-price determinant, you shift the entire demand curve (change in demand).
Rightward shift = increase in demand; Leftward shift = decrease in demand.
Quick worked example scenarios (orange juice and substitutes/complements):
a) Price of apple juice increases (substitutes): demand for orange juice shifts right (increase in demand) because apple juice is a substitute for orange juice.
b) Price of orange juice falls (own price change): movement along the orange juice demand curve; quantity demanded increases but the demand curve itself does not shift.
c) Income decreases (normal good or inferior good classification matters): for a normal good like orange juice, a decrease in income shifts demand left (decrease in demand); for an inferior good, the opposite would occur. This is a change in demand, not a movement along the curve.
General takeaways for exam prep:
Always distinguish between a change in quantity demanded (movement along a single demand curve due to price change) and a change in demand (shift of the entire demand curve due to non-price determinants).
The five shifters are the core non-price determinants of demand: number of buyers, income, prices of related goods, tastes and preferences, and expectations. Know how each shifts the curve (right or left) and the reasoning behind it.
When constructing market demand, remember to sum individual demand horizontally to obtain the market quantity demanded at each price.
Use ceteris paribus to justify why a given change is explained by one determinant at a time; remember that multiple shifters can act, but for analysis pick one at a time to illustrate the direction of shift.
Practical note on problem-solving style:
If a problem asks you to draw, you may need to construct up to three graphs: (i) an individual demand curve, (ii) another individual demand curve, and (iii) the market demand curve (sum of individuals).
The instructor emphasizes that you do not need perfectly scaled graphs for exams; focus on the direction and the type of change (shift vs movement).
Connections to broader economic principles:
Demand analysis is foundational for understanding price signals, resource allocation, and welfare in competitive markets.
The concept of ceteris paribus links to the broader methodological approach in economics: isolate observational relationships to identify causal effects.
Formulas and notations to remember:
Demand schedule: a table listing price and quantity demanded pairs:
At price $P1$, quantity demanded is $Q{d1}$; at price $P2$, quantity demanded is $Q{d2}$, etc.
Demand curve: downward-sloping relationship between price and quantity demanded.
Movement along the demand curve (change in quantity demanded) occurs when price changes:
Shift of the demand curve (change in demand) occurs when a non-price determinant changes:
Final prompt for next steps:
Practice drawing the demand curve for orange juice three times to illustrate the three scenarios described (a, b, c).
Be prepared to explain why a given change is a shift vs a movement and to identify which of the five shifters is driving the shift in each scenario.