Download change in the quantity demanded

 A market is the interaction of buyers and sellers for the
purpose of making an exchange, which establishes a
price for the goods or services exchanged.
 Markets exist for any commodity or service that has a
price.
 Money is used as a medium of exchange in most
markets.
 The demand side is the buyer’s side of the market.
 The supply side is the seller’s side of the market.
 Consumer demand does not stay constant, it changes
with various factors.
 Consumer preferences are transferred to the market in
terms of the goods and services that consumers buy.
 Consumers’ demand or desire for various goods and
services is represented by the quantity of goods and
services they are willing and able to purchase.
• Price
• Change in the price of substitute products
• Change in the price of complementary products
• Incomes
• Tastes and preferences
 In order to simplify the analysis of demand, all factors
influencing demand, other than price, remain
constant
• Expectations of future prices
• Number and characteristics of buyers
• Expectation of future incomes
 When the price of a product increases consumers may
substitute towards a relatively cheaper product
 When the price of a product increases, less of the
product is purchased at the current level of income.
 How do consumers respond to price changes?
 The inverse relationship between price and quantity
demanded can be represented by a demand schedule
and graphically by a demand curve.
 The inverse relationship between price and quantity
demanded is referred to as the law of downwardsloping demand.
 An increase in the price of sandwiches leads to a
decrease in the quantity of sandwiches demanded
in one week, holding all other factors influencing
demand constant.
 An increase in the price of sandwiches leads to a
decrease in the quantity of sandwiches demanded
per week, this is shown as a movement along the
demand curve.
 An increase in the price of hamburgers, a
substitute for sandwiches, leads a change in the
entire demand schedule for sandwiches.
Consumers will purchase more sandwiches.
 When any of the constant factors affecting
demand change this will lead to a change in the
demand schedule and consequently a shift of the
demand curve.
 An increase in the demand for sandwiches is shown as
a rightward shift of the demand curve.
 A change in consumers’ preferences that leads to a
reduction in the purchase of sandwiches is a decrease
in the demand for sandwiches, or a leftward shift of
the demand curve.
 There is a difference between a change in demand and
a change in quantity demanded.
 But a change in the good’s own price leads to a change
in the quantity demanded NOT a change to the entire
demand.
 A change in a constant factor affecting demand will
change the entire demand for a good or service.
 The supply side of the market is constantly changing
as the number and variety of products available to
consumers is constantly increasing.
 The seller’s side represents the quantity of goods and
services that sellers are willing and able to supply or
offer to the market.
 Seller’s side of the market is the supply side.
• Price
• Production costs
• Technological change
• Government regulation
 In order to simplify the analysis of supply, all factors
influencing supply, other than price, remain constant.
• Psychology of owner
• Weather conditions
 A higher price must be obtained in order for the
quantity supplied to increase.
 Additional costs of supplying more of a product to the
market increase beyond a certain level of output.
 How do suppliers respond to price changes?
 The positive relationship between price and quantity
supplied can be represented by a supply schedule and
graphically by a supply curve.
 The positive relationship between price and quantity
supplied is referred to as the law of upward-sloping
supply.
 An increase in the price of sandwiches leads to an
increase in the quantity of sandwiches supplied in
one week, holding all other factors influencing
supply constant.
 An increase in the price of sandwiches leads to an
increase in the quantity of sandwiches supplied per
week, this is shown as a movement along the supply
curve.
 An increase in weekly rent paid by store owners
leads to a change in the entire supply schedule for
sandwiches. The store owners will now charge a
higher price per sandwich.
 When any of the constant factors affecting supply
change this will lead to a change in the supply
schedule and consequently a shift of the supply curve.
 A decrease in the supply of sandwiches is shown as a
leftward shift of the supply curve.
 A change in production costs that leads to an increase
in the production of sandwiches is an increase in the
supply of sandwiches, a rightward shift of the supply
curve.
 There is a difference between a change in supply and a
change in quantity supplied.
 But a change in the good’s own price leads to a change
in the quantity supplied NOT a change to the entire
supply.
 A change in a constant factor affecting supply will
change the entire supply of a good or service.
 The primary function of the market is to bring
buyers and sellers together in order to establish a
price and to make an exchange.
 Suppliers would find that as they lower the price for
sandwiches they would be able to sell more
sandwiches.
 At $3.30 there would be a surplus of sandwiches
because suppliers would be producing 500, but
consumers would be purchasing only 300.
 If the suppliers decided to sell their sandwiches for
$3.30, consumers would be willing to purchase 300 per
week.
 Similarly if suppliers charge a price that is too low they
will be faced with a shortage of sandwiches, they will
then continue to increase the price until an
equilibrium price is reached.
 Suppliers will continue to reduce prices until they
reach a price at which the quantity demanded is equal
to the quantity supplied, the equilibrium price.
 The equilibrium price changes if changes take
place in the factors that affect the demand or
supply sides of the market.
 What effect does an increase in the price of
hamburgers have on the equilibrium price of
sandwiches?
 How will an increase in the price of butter, used in the
production of sandwiches, affect the equilibrium price
of sandwiches?
 In this way, the system of prices, rents, wages, and
interest organizes economic activity.
 The price system is the technique by which scarce
resources are allocated to the production of those
products and services that provide the greatest return to
the resource owner.
 A market system accomplishes two things:
1. Coordinates the exchange of goods and services, and
2. Establishes market prices.
 The price system has two distinct advantages in
allocating resources:
1. It is efficient in allowing thousands of individuals
to cooperate in making economic decisions, and
2. It transmits information to buyers and sellers
which assists consumers in allocating their
limited income to various purchases and
encourages sellers to adopt the least costly and
most efficient means of production.
 The free-market system and its establishment of prices
through the interaction of demand and supply
provides insight into the concept of value.
 If the price system is prevented from operating
shortages and surpluses will persist.
 The law of downward-sloping demand states that, all
other factors remaining constant, the quantity
demanded of a product increases as the price falls.
 Price elasticity of demand measures the extent to
which the quantity of a product demanded responds to
a change in price.

% Qd
Price Elasticity of Demand Coefficient = Ed 
% P
 Elastic demand is one in which a price change brings
about a greater than proportional change in the
quantity that consumers demand.
 %ΔQs > % ΔP thus Es > 1
If a supplier is not able to adjust supply readily when
the price changes, the supply is referred to as
inelastic.
%ΔQs < % ΔP thus Es < 1
 Unitary elastic supply is one in which a price change
brings about a proportional change in the quanity
supplied.
 %ΔQs = % ΔP thus Es = 1
Time
Ability to store product
Ability to substitute during production
 Income elasticity: change in quantity demanded to
changing income level.
 Products with negative IE are inferior goods.
 Products with positive IE are normal goods.
 Cross-elasticity of demand: measure the impact that
changes in price of one product have on the quantity
demanded of another product.
 Products with negative CE are complementary.
 Products with positive CE are substitutes.