2nd week 3rd lecture ecnomics
A. The Law of Demand
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope
A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).
Changes that decrease demand
Circumstances which can cause the demand curve to shift include:
- decrease in price of a substitute
- increase in price of a complement
- decrease in consumer income if the good is a normal good
- increase in consumer income if the good is an inferior good
Factors affecting market demand
Market or aggregate demand is the summation of individual demand curves. In addition to the factors which can affect individual demand there are three factors that can affect market demand (cause the market demand curve to shift):
- a change in the number of consumers,
- a change in the distribution of tastes among consumers,
- a change in the distribution of income among consumers with different tastes.
Some circumstances which can cause the demand curve to shift in include:- Decrease in price of a substitute
- Increase in price of a complement
- Decrease in income if good is normal good
- Increase in income if good is inferior good
B. The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price. But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.
extraction and contraction
