Transcript microeconomics

Demand and Supply
Constance Wehner
microeconomics

Behavior and decision-making of
individuals, households and businesses
demand



desire
willingness and
ability to pay
Law of Demand: the quantity demanded (of a
good or service) varies inversely with its price.
Representing demand




A table of quantities demanded at a variety
of prices is a demand schedule
Information from a demand schedule is
shown on a demand curve
Demand curve is always downward sloping
(negative)
Demand curves can be for an individual or
a market
Demand schedule & curve
Quantity
Price demanded
5
10
4
17
3
26
2
38
1
53
Demand & marginal utility




(utility means usefulness)
marginal utility: extra satisfaction a person
gets from one more unit of a product
Diminishing marginal utility: extra
satisfaction from using additional quantities
of a product begins to diminish
This will affect the qty demanded
A change in quantity demanded always
causes movement along the (original)
demand curve
Causes of change in QTY demanded:
Income effect



When prices drop & people are relatively
“richer”, they can buy more of a good
When prices rise & people are relatively
“poorer” they cannot buy as much
There will be a change in quantity
demanded in each case
Causes of change in QTY demanded:
Substitution effect


Consumers tend to replace a more costly
item with a relatively less expensive item
Good substitutes reduce quantity of more
expensive goods demanded
Demand elasticity: extent to which a price
change causes a change in qty demanded.



elastic demand if price change brings
relatively larger change in qty demanded
inelastic demand results in relatively small
change in demand qty when price changes
Proportional change in qty demanded to
price change is unit elastic
Elasticity & profits



Inelastic products produce increased
revenue with price increases
Elastic products will have reduced
revenues with price increases
Price reductions for elastic products give
increased revenues
Determinants of elasticity



Can purchase be
delayed?
Adequate substitutes
available?
Does purchase use a
large portion of
income?

where epsilon is the price
elasticity, P is the price of
the good, and Q is the
quantity demanded for the
good
Change in Demand (at all prices)




Entire demand curve
moves
Mvt to right is an
increase in demand
Mvt to left is a
decrease in demand
Change in demand of
multiple people is a
shift of the market
demand curve
Change in demand







People buy different
quantities of a good at
the same price b/c of
Income changes
consumer tastes
substitutes
complements
changed expectations
# of consumers
A DIRECT RELATIONSHIP:
price
and
supply provided