Summary chapter 2-demand and supply

Chapter 2: Demand and Supply
Law of demand – As purchasing price increases (decreases) the quantity a consumer is willing
to purchase decreases (increases). It is assumed that all other things remain constant.

Market demand curve – A curve (negative slope) indicating the total quantity of a good all
consumers are willing and able to purchase at each possible price, holding the prices of related
goods, income, advertising, and other variables constant.



Demand Shifters

Change in quantity demanded – Changes in the price of a good lead to a change in the quantity
demanded of that good. This corresponds to a movement along a given demand curve.



Change in demand – Changes in variables other than the price of a good, such as income or the
price of another good, lead to a change in demand. This corresponds to a shift of the entire
demand curve.

 Shift to the right gives an increase in demand.
 Shift to the left gives a decrease in demand.



Demand shifters – Variables other than the price of a good that influence demand (demand
curve moves to the right or to the left).

 Income

Normal good – A good for which an increase (decrease) in income leads to an increase
(decrease) in the demand for that good.

Inferior good – A good for which an increase (decrease) in income leads to a decrease (increase)
in the demand for that good.

 Prices of related goods

Substitutes – Goods for which an increase (decrease) in the price of one good leads to an increase
(decrease) in the demand for the other good.

Complements – Goods for which an increase (decrease) in the price of one good leads to a
decrease (increase) in the demand for the other good.

,  Advertising and consumer tastes

An increase in advertising makes the demand curve shift to the right.

Informative advertising has two possible effects:

 Consumers buy the same quantity for a higher price.
 Consumers buy a larger quantity for the same price.

Persuasive advertising can influence demand by altering the underlying taste of consumers.

 Population

If the overall size of the population increases (decreases), the demand curve shifts to the right
(left). The composition of a population can also affect the demand for a product.

 Consumer expectations

If the price of a product is expected to rise in the near future, people will substitute current
purchases for future purchases (called stockpiling). The demand curve shifts to the right.

 Other Factors – Any variable that affects the ability or willingness to buy a good or
service is a potential demand shifter.



Demand function – A function that describes how much of a good will be purchased at
alternative prices of that good and related goods, alternative income levels and alternative values
of other variables affecting demand.

Linear demand function – A representation of the demand function in which the demand for a
given good is a linear function of prices, income levels, and other variable influencing demand.

Law of demand
Complement
Substitute
Inferior good
Normal good




Consumer surplus – The value consumers get from a good but do not have to pay for. This is
the area above the price paid for a good, but below the demand curve.