Demand
Demand is willingness and ability of buyers to purchase goods and services.
determinants of demand (How many slices of pizza are buyers willing and able to purchase):
- price of pizza- the law of demand says that people purchase more of something when its price falls
- income
- tastes/preferences
- price of a compliment like beer
- price of a substitute like chicken wings
- demand
- amount people are willing and able to purchase at each possible price
- quantity demanded
- amount of the product people are willing and able to purchase at a specific price
A demand schedule is a list of the quantities demanded at different prices. When constructing a demand schedule, everything else that might affect demand is held constant. Consider the following demand schedule for pizza for person A:
Price Quantity Demanded
($/slice) (number of slices)
$2.50 1
2.00 2
1.50 3
1.00 4
0.50 5
There is an inverse relationship between price and quantity demanded: when price rises the quantity demanded falls. This "law of demand" is due to consumers substituting purchases away from a good whose price has risen towards relatively less expensive goods.
Here is the demand schedule for person B:
Price Quantity Demanded
($/slice) (number of slices)
$2.50 3
2.00 4
1.50 5
1.00 6
0.50 7
The market demand schedule is found by adding up the quantity demanded over all buyers at each price.
Price Quantity Demanded
($/slice) (number of slices)
$2.50 1 + 3 = 4
2.00 2 + 4 = 6
1.50 3 + 5 = 8
1.00 4 + 6 = 10
0.50 5 + 7 = 12
A demand curve is a graph of the demand schedule.
A change in the price of a good causes a movement along the demand curve. If the price of pizza falls from $2.00 to $0.50, the market moves from point A down the demand curve to point B. The quantity demanded rises from 6 to 12 slices of pizza. The change in the price of pizza has no effect on the demand for pizza. Demand is represented by the entire demand curve. A change in the price of pizza does not cause any change in the demand curve.
Supply
Supply is willingness and ability of firm to offer goods for sale in a market. A supply schedule is a list of the amounts firm are willing to offer for sale at each of the possible prices.
Seller A
Price Quantity Supplied
($/slice) (number of slices)
$2.50 4
2.00 3
1.50 2
1.00 1
0.50 0
Businesses are in business to make profits. When the price of a good rises it becomes more profitable to produce that good. So, firms will devote more resources to the production of a good whose price has risen. There is a direct, positive relationship between price and quantity supplied.
Seller B
Price Quantity Supplied
($/slice) (number of slices)
$2.50 10
2.00 8
1.50 6
1.00 4
0.50 2
The market supply schedule is found by adding up at each price by adding up the quantity supplied by each seller.
Price Quantity Supplied
($/slice) (number of slices)
$2.50 4 + 10 = 14
2.00 3 + 8 = 11
1.50 2 + 6 = 8
1.00 1 + 4 = 5
0.50 0 + 2 = 2
A supply curve is a graph of the supply schedule. A supply curve is upward sloping.
