Economics
Chapter 2: Supply and Demand
Perfect competition (preliminary definition) = A situation where the consumers and producers of a
product are price takers. (there are other features of a perfectly competitive market; these are examined
in Chapter 6.)
Price taker = A person or firm with no power to be able to influence the market price.
2.1 Demand
THE R E L AT I O N S H I P B E T W E E N D E M A N D A N D P R I C E
Law of demand = the quantity of a good demanded per period of time will fall as price rises and will rise
as price falls, other things being equal (ceteris paribus).
There are two reasons for this law:
People will feel poorer. Income effect = The effect of a change in price on quantity demanded
arising from the consumer becoming better or worse off as a result of the price change.
Substitution effect = The effect of a change in price on quantity demanded arising from the
consumer switching to or from alternative (substitute) products.
Quantity demanded = The amount of a good that a consumer is willing and able to buy at a given price
over a given period of time.
THE DE M A N D C U R V E
Demand schedule for an individual = A table showing the different quantities of a good that a person is
willing and able to buy at various prices over a given period of time.
Demand schedule (market) = A table showing the different total quantities of a good that consumers are
willing and able to buy at various prices over a given period of time.
Demand curve = A graph showing the relationship between the price of a good and the quantity of the
good demanded over a given time period. Price is measured on the vertical axis; quantity demanded is
measured on the horizontal axis. A demand curve can be for an individual consumer or group of
consumer, or more usually for the whole market.
Like market demand curves, individuals’ demand curves generally slope downwards from left to right:
they have negative slope. The lower the price of the product, the more a person is likely to buy.
In the textbooks, demand curves (and other curves too) are only occasionally used to plot specific data.
The term ‘curve’ is used even when the graph is a straight line.
OTHER DE T E R M I N A N T S O F DE M A N D
Price is not the only factor that determines how much of a good people will buy. Demand is also affected
by the following:
Tastes: The more desirable people find the good, the more they will demand. (advertising, trends
and fashion.)
The number and price of substitute goods: Substitute goods = A pair of goods which are
considered by consumers to be alternatives to each other. As the price of one goes up, the
demand for the other rises.
The number and price of complementary goods: Complementary goods = A pair of goods
consumed together. As the price of one goes up, the demand for both goods will fall.
Income: Normal good = A good whose demand rises as people’s income rise. Inferior good = A
good whose demand falls as people’s incomes rise.
, Distribution of income: If national income were redistributed from the poor to the rich, the
demand for luxury goods would rise. At the same times, as the poor got poorer they might have
to buy more inferior goods; demand for these would rise too.
Expectations of future price changes: If people think that prices are going to rise in the future,
they are likely to buy more now before the price does go up.
M OV E M E N T S A LO N G A N D S H I F T S I N T H E D E M A N D C U R V E
A demand curve is constructed on the assumption that ‘other things remain equal’. It is assumed that,
apart from price, none of the determinants of demand change.
If a change in one of the other determinants causes demand to rise – say, income rises – the whole curve
will shift to the right. This shows that at each price more will be demanded than before.
If a change in a determinant other than price causes demand to fall, the whole curve will shift to the left.
Change in demand = The term used for a shift in the demand curve. It occurs when a determinant of
demand other than price changes.
Change in the quantity demanded = The term used for a movement along the demand curve to a new
point. It occurs when there is a change in price.
2.2 Supply
S U P P LY AND PRICE
When the price of a good rises, the quantity supplied will also rise.
There are three reasons for this:
As firms supply more, they are likely to find that beyond a certain level of output, costs rise more
and more rapidly. If higher output involves higher costs of producing each unit, producers will
need to get a higher price if they are to be persuaded to produce extra output. (short-run)
The higher the price of the good, the more profitable it becomes to produce. (short-run)
Given time, if the price of a good remains high, new producers will be encouraged to enter the
industry. Total market supply thus rises. (long-term)
THE S U P P LY C U R V E
Supply schedule = A table showing the different quantities of a good that producers are willing and able
to supply at various prices over a given time period. A supply schedule can be for an individual producer
or group of producers, or for all producers.
Supply curve = A graph showing the relationship between the price of a good and the quantity of the
good supplied over a given period of time.
Price vertical axis
Quantity horizontal axis
Chapter 2: Supply and Demand
Perfect competition (preliminary definition) = A situation where the consumers and producers of a
product are price takers. (there are other features of a perfectly competitive market; these are examined
in Chapter 6.)
Price taker = A person or firm with no power to be able to influence the market price.
2.1 Demand
THE R E L AT I O N S H I P B E T W E E N D E M A N D A N D P R I C E
Law of demand = the quantity of a good demanded per period of time will fall as price rises and will rise
as price falls, other things being equal (ceteris paribus).
There are two reasons for this law:
People will feel poorer. Income effect = The effect of a change in price on quantity demanded
arising from the consumer becoming better or worse off as a result of the price change.
Substitution effect = The effect of a change in price on quantity demanded arising from the
consumer switching to or from alternative (substitute) products.
Quantity demanded = The amount of a good that a consumer is willing and able to buy at a given price
over a given period of time.
THE DE M A N D C U R V E
Demand schedule for an individual = A table showing the different quantities of a good that a person is
willing and able to buy at various prices over a given period of time.
Demand schedule (market) = A table showing the different total quantities of a good that consumers are
willing and able to buy at various prices over a given period of time.
Demand curve = A graph showing the relationship between the price of a good and the quantity of the
good demanded over a given time period. Price is measured on the vertical axis; quantity demanded is
measured on the horizontal axis. A demand curve can be for an individual consumer or group of
consumer, or more usually for the whole market.
Like market demand curves, individuals’ demand curves generally slope downwards from left to right:
they have negative slope. The lower the price of the product, the more a person is likely to buy.
In the textbooks, demand curves (and other curves too) are only occasionally used to plot specific data.
The term ‘curve’ is used even when the graph is a straight line.
OTHER DE T E R M I N A N T S O F DE M A N D
Price is not the only factor that determines how much of a good people will buy. Demand is also affected
by the following:
Tastes: The more desirable people find the good, the more they will demand. (advertising, trends
and fashion.)
The number and price of substitute goods: Substitute goods = A pair of goods which are
considered by consumers to be alternatives to each other. As the price of one goes up, the
demand for the other rises.
The number and price of complementary goods: Complementary goods = A pair of goods
consumed together. As the price of one goes up, the demand for both goods will fall.
Income: Normal good = A good whose demand rises as people’s income rise. Inferior good = A
good whose demand falls as people’s incomes rise.
, Distribution of income: If national income were redistributed from the poor to the rich, the
demand for luxury goods would rise. At the same times, as the poor got poorer they might have
to buy more inferior goods; demand for these would rise too.
Expectations of future price changes: If people think that prices are going to rise in the future,
they are likely to buy more now before the price does go up.
M OV E M E N T S A LO N G A N D S H I F T S I N T H E D E M A N D C U R V E
A demand curve is constructed on the assumption that ‘other things remain equal’. It is assumed that,
apart from price, none of the determinants of demand change.
If a change in one of the other determinants causes demand to rise – say, income rises – the whole curve
will shift to the right. This shows that at each price more will be demanded than before.
If a change in a determinant other than price causes demand to fall, the whole curve will shift to the left.
Change in demand = The term used for a shift in the demand curve. It occurs when a determinant of
demand other than price changes.
Change in the quantity demanded = The term used for a movement along the demand curve to a new
point. It occurs when there is a change in price.
2.2 Supply
S U P P LY AND PRICE
When the price of a good rises, the quantity supplied will also rise.
There are three reasons for this:
As firms supply more, they are likely to find that beyond a certain level of output, costs rise more
and more rapidly. If higher output involves higher costs of producing each unit, producers will
need to get a higher price if they are to be persuaded to produce extra output. (short-run)
The higher the price of the good, the more profitable it becomes to produce. (short-run)
Given time, if the price of a good remains high, new producers will be encouraged to enter the
industry. Total market supply thus rises. (long-term)
THE S U P P LY C U R V E
Supply schedule = A table showing the different quantities of a good that producers are willing and able
to supply at various prices over a given time period. A supply schedule can be for an individual producer
or group of producers, or for all producers.
Supply curve = A graph showing the relationship between the price of a good and the quantity of the
good supplied over a given period of time.
Price vertical axis
Quantity horizontal axis
