* Chapter 3

Demand, Supply, and Prices

*Demand- the desire to own something and

the ability to pay for it

*Both must be present
*Law of Demand- when a goods price is
lower, consumers will buy more of it. When
the price is higher, consumer will buy less
of it

*Chapter 3 Section 1:

Fundamentals of Demand

*Law of Demand results from two

overlapping patterns:
*Substitution effect
*Income Effect

*Chapter 3 Section 1:

Fundamentals of Demand

*Substitution effect- takes place

when a consumer reacts to the rise

in the price of one good by
consuming less of that good and
more of a substitute good
*Can also apply to a drop in prices

*Chapter 3 Section 1:

Fundamentals of Demand

*Income effect- if the price for the good

goes up and you cannot afford to buy as

much of it, but dont consumer another
good in its place
*Ex: movie tickets

* Remember demand is judged on how much of

an item we buy and not on how much money
we spend on an item

*Chapter 3 Section 1:

Fundamentals of Demand

*Demand schedule- table that lists the

quantity of a good that a person will

purchase at various prices in a market

*Chapter 3 Section 1:

Fundamentals of Demand

*Market Demand Schedule- quantities

demanded at various prices by all
consumers in the market

*Chapter 3 Section 1:

Fundamentals of Demand

*Demand Curve- graphic representation of a

demand schedule
*Vertical axis- lowest prices at the
bottom, highest prices at the top
*Horizontal axis- lowest quantity on the
left, highest quantity on the right
*Limitations:
*Cannot predict market changes

*Chapter 3 Section 1:

Fundamentals of Demand

*Shifts in demand are not always connected

to price
*Ceteris paribus-all other things held
constant
*Demand schedule assumes everything
but price remains constant
*Demand schedules and demand curves
are only accurate if ceteris paribus
remains true

*Chapter 3 Section 2:
Shifts in Demand

*When we drop the ceteris paribus

rule- we no longer move along the

demand curve, instead the entire
curve shifts

*Chapter 3 Section 2:
Shifts in Demand

* Non-price determinants- factors that can lead

to the shifting of demand up or down

* Income
* Consumer expectations
* Demographics
* Consumer taste
* Advertising

*Chapter 3 Section 2:
Shifts in Demand

*Income:
*Normal goods- goods that consumers

demand more of when their income

increases
*Inferior goods- goods that you would buy
in smaller quantities, or not at all, if
your income were to rise and you could
afford something better
*Shift to the right = increase in demand
*Shift to the left= decrease in demand

*Chapter 3 Section 2:
Shifts in Demand

* Consumer expectations:

* Expectations about the future

* Could be the future of that particular item

* Demographics

* The statistical characteristics of populations

* Age
* Race
* Gender
* Occupation
* Income levels

*Chapter 3 Section 2:
Shifts in Demand

* Population:

* Changes in population of a market effect the

demand in that market

* Consumer taste and advertising:

* Advertising and publicity play a role in demand

*Chapter 3 Section 2:
Shifts in Demand

* Price of Related Goods:

* Complements: two goods that are bought and

used together
* Substitutes: goods that are used in place of one
another

*Chapter 3 Section 2:
Shifts in Demand