Boundless EconomicsIntroducing Supply and Demand
Demand
The Law of DemandIn general, the law of demand states that the quantity demanded and the priceof a good or service is inversely related, other things remaining constant.
Learning ObjectivesExplain the concept of demand and discuss the factors that affect it
Key TakeawaysKey PointsThe demand curve is downward sloping, indicating the negative relationshipbetween the price of a product and the quantity demanded.For normal goods, a change in price will be reflected as a move along thedemand curve while a non-price change will result in a shift of the demandcurve.Two exceptions to the law of demand are Giffen goods and Veblen goods.
Key TermsGiffen good: A good which people consume more of as only the price rises;Having a positive price elasticity of demand.Veblen good: A good for which people's preference for buying them increasesas a direct function of their price, as greater price confers greater status.normal good: A good for which demand increases when income increases andfalls when income decreases but price remains constant.
In economics, the law of demand states that the quantity demanded and theprice of a good or service is inversely related, other things remaining constant.Therefore, the demand curve will generally be downward sloping, indicating thenegative relationship between the price of a good or service and the quantitydemanded.
Movement along the Demand CurveIf the income of the consumer, prices of the related goods, and preferences ofthe consumer remain unchanged, then the change in quantity of gooddemanded by the consumer will be negatively correlated to the change in theprice of the good or service. The change in price will be reflected as a movealong the demand curve.
Shift in the Demand CurveThe demand curve will shift, move either inward or outward as a result of non-price factors. A shift in demand can be related to the following factors (non-exhaustive list):
Consumer preferencesConsumer incomeChange in the price of related goods (i.e. compliments)Change in the number of buyersConsumer expectations
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Law of Demand: A demand curve, shown in red andshifting to the right, demonstrating the inverserelationship between price and quantity demanded (thecurve slopes downwards from left to right; higher pricesreduce the quantity demanded).
Though in general terms and specific to normal goods, demand will exhibit adownward slope, there are exceptions: Giffen goods and Veblen goods
Giffen GoodsA Giffen good describes an extreme case for an inferior good. In theory, a Giffengood would display the characteristic that as price increases, demand for theproduct increases. In the real world application, there has not beena true example of a Giffen good, though a popular albeit historically inaccurateexample is the purchase of potatoes (an inferior good) as prices continued to
increase during the Irish potato famine.
Veblen GoodsSome expensive commodities like diamonds, expensive cars, designer clothingand other high-price limited items, are used as status symbols to display wealth.The more expensive these commodities become, the higher their value as astatus symbol and the greater the demand for them. The amount demanded ofthese commodities increase with an increase in their price and decrease with adecrease in their price. These goods are known as a Veblen goods.
Demand Schedules and Demand CurvesA demand curve depicts the price and quantity combinations listed in a demandschedule.
Learning ObjectivesDescribe the relationship between demand curves and demand schedules
Key TakeawaysKey PointsDemand curves are a graphical representation of a demand schedule, which isthe table view of an economic agents' price to quantity relationship.Demand curves embody preferences, substitution potential and income, as wellas other characteristics that influence an economic agent's ability to assesswillingness to pay at a specific point in time for goods and services.Demand curves may be linear or curved.Aggregate demand is the sum of the quantity demanded for a specific priceover a group of economic agents.
Key Termsequilibrium: The condition of a system in which competing influences arebalanced, resulting in no net change.
The demand curve is a graphical representation depicting the relationshipbetween a commodity's different price levels and quantities which consumersare willing to buy. The curve can be derived from a demand schedule, which isessentially a table view of the price and quantity pairings that comprise thedemand curve.
Demand Schedule and Curve: The demand curve is the graphicalrepresentation of the economic entity's willingness to pay for a goodor service. It is derived from a demand schedule, which is the tableview of the price and quantity pairs that comprise the demand curve.
Given that in most cases, as the price of a good increases, agents will likelydecrease consumption and substitute away to another good or service, thedemand curve embodies a negative price to quantity relationship. The curvetypically slopes downward from left to right; though there are some goods andservices that exhibit an upward sloping demand, these goods and services arecharacterized as abnormal.
The demand curve of an individual agent can be combined with that of othereconomic agents to depict a market or aggregate demand curve. Using ademand schedule, the quantity demanded per each individual can be summedby price, resulting in an aggregate demand schedule that provides the totaldemanded specific to a given price level. The plotting of the aggregatedquantity to price pairings is what is referred to as an aggregate demand curve.In this manner, the demand curve for all consumers together follows from thedemand curve of every individual consumer.
The demand curve in combination with the supply curve provides the marketclearing or equilibrium price and quantity relationship. This is found at theintersection or point at which the supply and demand curves cross each other.
Market DemandMarket demand is the summation of the individual quantities that consumersare willing to purchase at a given price.
Learning ObjectivesExamine the relationship between market demand and individual demand
Key TakeawaysKey PointsThe graphical representation of a market demand schedule is called the marketdemand curve.Following the law of demand, the demand curve is almost always represented asdownward-sloping. This means that as price decreases, consumers will buymore of the good.Two different hypothetical types of goods with upward-sloping demand curvesare Giffen goods and Veblen goods.
Key Terms
Market demand: The summation of the individual quantities that consumersare willing to purchase at a given price.
The demand schedule represents the amount of some good that a buyer iswilling and able to purchase at various prices. The relationship between priceand quantity demanded reflected in this schedule assumes the following factorsremain constant:
Income levels;Population;Tastes and preferences;Price of substitute goods; andPrice of complementary goods
The demand schedule is depicted graphically as the demand curve. The demandcurve is shaped by the law of demand. In general, this means that the demandcurve is downward-sloping, which means that as the price of a good decreases,consumers will buy more of that good.
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Demand Curve: The demand curve is the graphicaldepiction of the demand schedule. For most goods andservices, the demand curve exhibits a negativerelationship between price and quantity and is as a resultdownward sloping.
A market demand schedule is a table that lists the quantity of a good allconsumers in a market will buy at every different price. A market demandschedule for a product indicates that there is an inverse relationship betweenprice and quantity demanded. The graphical representation of a market demandschedule is called the market demand curve.
Market DemandSchedule: A marketdemand schedule is a tablethat lists the quantity of agood all consumers in amarket will buy at everydifferent price.
The determinants of demand are:
IncomeTastes and preferencesPrices of related (AKA complimentary) goods and servicesPrices of substitutesNumber of potential consumers
The market demand is the summation of the individual quantities that
consumers are willing to purchase at a given price.
As noted, both individual demand curves and market demand are typicallyexpressed as downward shaping curves. However, special cases exist where thepreference for the good or service may be perverse. Two different hypotheticaltypes of goods with upward-sloping demand curves are Giffen goods (aninferior but staple good) and Veblen goods (goods characterized as being moredesirable the higher the price; luxury or status items).
Ceteris ParibusCeteris paribus is defined as "all else being equal," or "holding all else constant".
Learning ObjectivesExplain the rationale for the assumption of ceteris paribus
Key TakeawaysKey PointsWhen ceteris paribus is employed in economics, all other variables with theexception of the variables under evaluation are held constant.An example of the use of ceteris paribus in macroeconomics is: what wouldhappen to the demand for labor by firms if a minimum wage was imposed at alevel above the prevailing wage rate, ceteris paribus.An example of the use of ceteris paribus in microeconomics is: what wouldhappen for the demand for a normal good when income increases, ceterisparibus.
Key Termsceteris paribus: all else equal; holding everything else constant
Economics seeks to interpret, analyze and or evaluate situations that occurbetween individuals, firms and other entities. Due to the potential for multipleagents and other known and unknown external activities to be involved orpresent but not relevant to an analysis, economics employs the assumption of"all else constant," which is the English translation of the Latin phrase "ceterisparibus".
When the ceteris paribus assumption is employed in economics, all othervariables – with the exception of the variables under evaluation – are heldconstant.
A Macroeconomic ExampleWhat would happen to the demand for labor by firms if a minimum wage wasimposed at a level above the prevailing wage rate, ceteris paribus? As depictedin below, the supply and demand curve are held constant, as are labor andleisure preferences for workers, and output considerations for firms, in additionto all other variables and characteristics embedded within the shape of thesupply and demand curves. Thus, what is being evaluated is the impact of aconstraint on market equilibrium.
Macroeconomics: Binding price floor: E is theequilibrium wage level when there is no bindingminimum wage. When a minimum wage isimposed, ceteris paribus, suppliers of labor arewilling to provide more labor than firms (demandfor labor) are willing to purchase at the bindingminimum wage rate. There is no shifting of eithercurve related to behavior influenced by thehigher wage rate because ceteris paribus isholding labor-leisure trade-off (of workers) and
substitution of labor (by firms) constant, alongwith other potential influencing variables.A Microeconomic ExampleWhat would happen for the demand for a normal good when income increases,ceteris paribus? In this case, as depicted in, a consumer's preferences for thegood and his demand for complements and substitutes are being held constantalong with other attributes that could potentially impact his demand for a good,such as the good's price. The supply of the good and the market and firmcharacteristics implicit in the shape of the supply curve are also held constant.This allows for an analysis of the increase in income, on the consumer's demandfor the single good alone.
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Microeconomics: Income and Demand: A consumer isable to purchase a normal good and has a demandcurve, D1, which provides the relationship between price
and quantity given his preferences, income and otherconsumption attributes. Assuming an increase in hisincome, ceteris paribus, his demand curve would shiftoutward to D2, corresponding to a higher quantity foreach purchase price. The consumer would then move hisconsumption for the good from Q1 to Q2, increasing hispurchase of the good.Changes in Demand and Shifts in the Demand CurveDemand is the relationship between the willingness to purchase a quantity of agood or service at a specific price.
Learning ObjectivesDistinguish between shifts in the demand curve and movement along thedemand curve
Key TakeawaysKey PointsA change in price will result in a movement along a demand curve.A change in a non-price variable will result in a shift in the demand curve.An outward shift in demand will occur if income increases, in the case of anormal good; however, for an inferior good, the demand curve will shift inwardnoting that the consumer only purchases the good as a result of an incomeconstraint on the purchase of a preferred good.
Key Termsnormal good: A good for which demand increases when income increases andfalls when income decreases but price remains constant.inferior good: a good that decreases in demand when consumer income rises;having a negative income elasticity of demand.
The demand curve is a graphical representation of an economic agent'swillingness to purchase a given quantity of a good or service at a specific pricebased on preferences, income, and other prevailing factors at a given point intime. Demand curves in combination with supply curves, which depict the priceto quantity relationship of producers, are a representation of the goods andservices market. Where the two curves intersect is market equilibrium, the priceto quantity relationship where demand and supply are equal.
Movements in demand are specific to either movements along a given demandcurve or shifts of the entire demand curve.
Movements along the demand curve are due to a change in the price of a good,holding constant other variables, such as the price of a substitute. If the price ofa good or service changes the consumer will adjust the quantity demandedbased on the preferences, income and prices of other factors embedded withina given curve for the time period under consideration.
Shifts in the demand curve are related to non-price events that include income,preferences and the price of substitutes and complements. An increase inincome will cause an outward shift in demand (to the right) if the good orservice assessed is a normal good or a good that is desirable and is thereforepositively correlated with income. Alternatively, an increase in income couldresult in an inward shift of demand (to the left) if the good or service assessed isan inferior good or a good that is not desirable but is acceptable when theconsumer is constrained by income.
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Demand Curve: A demand curve provides an economicagent's price to quantity relationship related to a specificgood or service. Movements along a demand curve arerelated to a change in price, resulting in a change inquantity; shifts is demand (D1 to D2) are specific tochanges in income, preferences, availability ofsubstitutes and other factors.
A change in preferences could result in an increase (outward shift) or decrease(inward shift) in the quantity level desired for a specific price; while a change inthe price of a substitute, could result in an outward shift if the price of thesubstitute increases and an inward shift if the substitute's price decreases. Thedemand curve for a good will shift in parallel with a shift in the demand for acomplement.
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