SECTION 2: THE ALLOCATION OF RESOURCES

CHAPTER 7: DEMAND

Demand: The effective demand for a good or service is the quantity that price-taking buyers are
WILLING AND ABLE to purchase at any given price over a given period of time.
Demand schedule: A table that shows how much of a good or service consumers are willing and
able to buy at different prices.
Demand curve: A graphical representation of the demand schedule, it shows the relationship
between the price and the quantity demanded.
Law of Demand: A Law which states that there is an inverse relationship between price and
quantity demanded, so demand curves are downward sloping.

MOVEMENTS ALONG THE DEMAND CURVE

Changes in the product price lead to changes in QUANTITY DEMANDED and they are
associated with MOVEMENTS ALONG the demand curve.
Changes in the product price do NOT lead to changes in DEMAND and they are NOT associated
with SHIFTS of the demand curve.
Extension of demand: An increase in the quantity demanded of a good or service caused by a
decrease in its price, and represented by a movement down along the demand curve.
Contraction of demand: An increase in the quantity demanded of a good or service caused by
an increase in its price, and represented by a movement up along the demand curve.
 THE DETERMINANTS OF DEMAND
Determinants of demand: Factors whose changes lead to changes in demand and are associated
with shifts of the demand curve.
RIGHTWARD SHIFT = INCREASE IN DEMAND
LEFTWARD SHIFT = DECREASE IN DEMAND
 DEMAND & INCOME
Normal good: A good whose quantity demanded increases when the buyer’s income increases,
and vice versa.
Inferior good: A good whose quantity demanded decreases when the buyer’s income decreases,
and vice versa.
 DEMAND AND THE PRICE OF RELATED GOODS
Substitutes in consumption (or Competitive demand): Good X and Good Y are substitutes in
consumption when consumers can replace Good X by Good Y, and vice versa.
Examples: apples & oranges, brooms & vacuums, glasses & contact lenses, etc.
Complements in consumption (or joint demand): Good X and Good Y are complements in
consumption if they must be consumed together to provide satisfaction.
Examples: remote controls & batteries, coffee machines & coffee beans, flour & yeast, etc.
 OTHER DETERMINANTS OF DEMAND
The number of buyers——the population

Preferences (e.g. tastes, fads, beliefs, cultural shifts, etc.)

Expectations (e.g. prices, income, etc.)
Legislation
Advertising compaigns
Weather conditions
INDIVIDUAL VS MARKET DEMAND
Individual demand: The relationship between the price and the quantity demanded by an
individual buyer.
Market demand: The relationship between the price and the quantity demanded by all buyers
in a particular market.
MARKET DEMAND CURVE = HORIZONTAL SUM OF INDIVIDUAL DEMAND CURVES