4. Basics of Supply and Demand
Lecture Notes
1. A market is nothing more or less than the locus of exchange; it is not necessarily
a place, but simply buyers and sellers coming together for transactions.
2. The law of demand states that as price increases (decreases) consumers will
purchase less (more) of the specific commodity.
a. The demand schedule (demand curve) reflects the law of demand it is a
downward sloping function and is a schedule of the quantity demanded at
each and every price.
As price falls from P1 to P2 the quantity demanded increases from Q1 to Q2. This is a
negative relation between price and quantity, hence the negative slope of the demand
schedule; as predicted by the law of demand.
1. utility (use, pleasure, jollies) from the consumption of commodities.
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, 2. The change in utility derived from the consumption of one more unit of
a commodity is called marginal utility.
3. Diminishing marginal utility is the fact that at some point further
consumption of a commodity adds smaller and smaller increments to
the total utility received from the consumption of that commodity.
b. The income effect is the fact that as a person's income increases (or the
price of item goes down [which effectively increases command over
goods] more of everything will be demanded.
c. The substitution effect is the fact that as the price of a commodity
increases, consumers will buy less of it and more of other commodities.
3. Demand Curve
a. Price and quantity - again the demand curve shows the negative relation
between price and quantity.
b. Individual versus market demand - a market demand curve is simply an
aggregation of all individual demand curves for a particular commodity.
c. Nonprice determinants of demand; and a shift to the left (right) of the
demand curve is called a decrease (increase) in demand. The nonprice
determinants of demand are:
1. tastes and preferences of consumers,
2. the number of consumers,
3. the money incomes of consumers,
4. the prices of related goods, and
5. consumers' expectations concerning future availability or prices of
the commodity.
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Lecture Notes
1. A market is nothing more or less than the locus of exchange; it is not necessarily
a place, but simply buyers and sellers coming together for transactions.
2. The law of demand states that as price increases (decreases) consumers will
purchase less (more) of the specific commodity.
a. The demand schedule (demand curve) reflects the law of demand it is a
downward sloping function and is a schedule of the quantity demanded at
each and every price.
As price falls from P1 to P2 the quantity demanded increases from Q1 to Q2. This is a
negative relation between price and quantity, hence the negative slope of the demand
schedule; as predicted by the law of demand.
1. utility (use, pleasure, jollies) from the consumption of commodities.
18
, 2. The change in utility derived from the consumption of one more unit of
a commodity is called marginal utility.
3. Diminishing marginal utility is the fact that at some point further
consumption of a commodity adds smaller and smaller increments to
the total utility received from the consumption of that commodity.
b. The income effect is the fact that as a person's income increases (or the
price of item goes down [which effectively increases command over
goods] more of everything will be demanded.
c. The substitution effect is the fact that as the price of a commodity
increases, consumers will buy less of it and more of other commodities.
3. Demand Curve
a. Price and quantity - again the demand curve shows the negative relation
between price and quantity.
b. Individual versus market demand - a market demand curve is simply an
aggregation of all individual demand curves for a particular commodity.
c. Nonprice determinants of demand; and a shift to the left (right) of the
demand curve is called a decrease (increase) in demand. The nonprice
determinants of demand are:
1. tastes and preferences of consumers,
2. the number of consumers,
3. the money incomes of consumers,
4. the prices of related goods, and
5. consumers' expectations concerning future availability or prices of
the commodity.
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