DEMAND.....

DEMAND
Demand
Catherine’s Demand Schedule and Demand Curve
Market Demand is the Sum of Individual Demands
Law of Demand
The law of demand states that
the quantity demanded of a good falls when the price of the good rises, and vice versa, provided all other factors that affect buyers’ decisions are unchanged
“provided all other factors … are unchanged”
That’s an important phrase in the wording of the Law of Demand
The quantity demanded of a consumer good such as  ice cream depends on
The price of ice cream
The prices of related goods
Consumers’ incomes
Consumers’ tastes
Consumers’ expectations about future prices and incomes
Number of buyers, etc
The Law of Demand says that the quantity demanded of a good is inversely related to its price, provided all other factors are unchanged
Why Might Demand Increase?
How can we explain the difference in Catherine’s behavior in situations A and B?
Why does she consume more in situation B at every possible price?
Shifts in the Market Demand Curve
… are caused by changes in:
Consumer income
Prices of related goods
Tastes
Expectations, say, about future prices and prospects
Number of buyers

Shifts in the Demand Curve
Shifts in the Demand Curve
The Law of Demand—Explanations
There are two ways to explain the Law of Demand
Substitution effect
Income effect
Substitution Effect
When the price of a good decreases, consumers substitute that good instead of other competing (substitute) goods

Income Effect
A decrease in the price of a commodity is essentially equivalent to an increase in consumers’ income
Lower Prices = Higher Income
Income Effect
Consumers respond to a decrease in the price of a commodity as they would to an increase in income
They increase their consumption of a wide range of goods, including the good that had a price decrease
SUPPLY
SUPPLY
Quantity supplied is the amount of a good that sellers are willing and able to sell
Supply is a full description of how the quantity supplied of a commodity responds to changes in its price
Ben’s supply schedule and supply curve
Market supply and individual supplies
Market supply and individual supplies
Law of Supply
The law of supply states that, the quantity supplied of a good rises when the price of the good rises, as long as all other factors that affect suppliers’ decisions are unchanged

Law of Supply—Explanation
How can we make sense of the numbers in Ben’s supply schedule?
The best guess is that his costs must be something like the cost schedule below.
Shifts in the Supply Curve: What causes them?
Supply Shift
How could Ben’s supply have increased?
Shifts in the Supply Curve…
… are caused by changes in
Input prices
Technology
Number of sellers (short run)
The market supply will shift right if
Raw materials or labor becomes cheaper
The technology becomes more efficient
Number of sellers increases