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Topics: Supply and demand, Economics, Consumer theory Pages: 22 (517 words) Published: February 22, 2015
Unit 2: Demand & Supply

Text:
Economics for Today Chapter 3
and Supplementary Material
1

Market
Any situation that brings buyers and
sellers together for exchange of
good and services (g/s)

2

Example – Pizza market:


sellers comprise the individuals and
firms that sell pizza – Supply



buyers include all individuals who buy,
or might buy pizza - Demand

Does not have to be a physical place


e.g. EBay, foreign exchange market



A market occurs as long as buyers and
sellers are in communication

Demand
the economics of the consumer /
buyer

Demand
If you demand something, then you:
 want it (willing)
 can afford it
(able)
 have made a definite plan to buy it
Demand reflects a decision about which
wants to satisfy
6

Demand
the quantity demanded of a
particular g/s that consumers
plan to buy at a particular price in
a particular time period

Demand
The Law of Demand:
Other things remaining the same:
 As price rises the quantity demanded falls
 As price falls the quantity demanded rises
 Exceptions:
e.g. status symbols


8

The Law Of Demand results from:

Substitution effect
When the relative price (opportunity
cost) of a good or service rises,
people seek substitutes for it, so the
quantity demanded decreases.

10

Income effect
When the price of a good or service rises
relative to income, people’s spending
power falls, so the quantity demanded
decreases.

An Inverse Relationship

At the higher price consumers will buy
fewer units, and at a lower price they
will buy more units.
12

The Law of Diminishing
Marginal Utility
 utility

- the satisfaction or
enjoyment derived from the
consumption of a good
 Aim of the consumer is to
maximise utility



As a person increases consumption of a
good, the Marginal Utility they get from
each additional unit of that good
declines 

The MU of the
second chocolate
will be smaller than
that of the first, and
the MU of the third
will be smaller still. 
The MU of the tenth
chocolate would
likely be negative. 

 To

get you to buy another good, the
price on this good will have to be
lower
 So at higher prices consumers will
buy less, and at lower prices they
will buy more
 An inverse relationship

An Inverse Relationship

At the higher price consumers will buy
fewer units, and at a lower price they
will buy more units
17

The Demand Curve
Price
40
30
Demand
for DVD’s

20
10

0

4

6

10

16
Quantity

18

Individual
Demand


the quantity of a

Market
Demand

product a single
buyer for a g/s



will attempt to
purchase


The demand
for a good and
services by all
households
sum of the
individual
demand for
that product

Determinants of Demand
 1.
 2.

Price of the good itself

Factors other than Price
(Demand factors)

tastes

Credit
availability

age
distribution
technology

population
size

consumer
expectations

prices
of
substitutes

disposable
income
prices
of
complements

weather,
season

A substitute is a good that can be
used in place of another good.
Example: tea and coffee

22

A complement is a good that is
used in conjunction with
another good.
Example: cars and petrol

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