Chapter 3

The graphical
representation of the
demand schedule
is the demand curve.
Why does quantity demanded go down as price goes up?

There are mainly two reasons:

People substitute lower priced goods for higher priced goods

(if price of beef goes up many people substitute beef by mutton)

If price of a good increases (decreases), relative income falls

and people tend to consume less.
 Individual Demand curve and market demand
curve
Individual demand curve: presents the price-quantity demand combination of
a particular good for a single buyer

Market demand curve: add individual demand curves

Market demand schedule: derived by adding the quantities demanded at

each price. For example in the following table at price 11 market demand is 11.

From market demand schedule we can draw marker demand curve. Market
demand curve is downward sloping like the individual demand curve.

Table 2 Market Demand Schedule for Good X

Price ($) Jones Smith Market= Jones + Smith

15 1 2 3
13 3 4 7
11 5 6 11
10 6 7 13
Factors Change in the Change in Demand Change in demand
factors curve
Income Normal good Income rises Demand increases Shifts right
Income falls Demand falls Shifts left
Example: CDs
Inferior good Income rises Demand falls Shifts left
(example: baked beans) Income falls Demand increases Shifts right
Neutral good (example: Income rises Demand remains same Does not shift
toothpaste) Income falls Demand remains same Does not shift
Prices of related goods Substitutes (Coca-Cola Price of Pepsi-Cola Demand for Coca-Cola Demand curve for
and Pepsi-Cola rises increases Coca-Cola shifts right
Price of Pepsi-Cola Demand for Coca-Cola Demand curve for
falls decreases Coca-Cola shifts left
Complements (tennis Price of tennis rackets Demand for tennis balls Demand curve for
rackets and tennis rises decreases tennis balls shifts left
balls) Price of tennis rackets Demand for tennis balls Demand curve for
falls increases tennis balls shifts right
Number of buyers Increases Demand increases Shifts right
Decreases Demand decreases Shifts left
Expected future price increase Current demand Shifts right
increase
Decrease Current demand Shifts left
decrease
Price Increase Decrease in quantity Movement along the
demand curve
Decrease Increase in quantity Movement along the
demand curve
Normal goods: A good the demand for which rises (falls) as
income rises (falls). Example: DVD

Inferior good: A good demand for which falls (rises) as income

rises (falls). Example: baked beans

Neutral good: A good demand for which does not change as

income rises or falls. Example: tooth paste

Substitutes: Two goods that satisfy similar needs or desire. If two

goods are substitutes, the demand for one rises as the price of the
other rises. Example : Pepsi-Cola and Coca-Cola

Complements: Two goods that are used jointly in consumption. If

two goods are complements, the demand for one rises as the price of
the other falls. Example: tennis rackets and tennis balls
 Factor Change in the Change in supply/ Supply curve
factor quantity supplied
Price increases Increase in quantity Movement along the curve
supplied from left to right
Decreases
Prices of Increases Decrease in supply Supply curve shifts
inputs leftward
Decreases Increase in supply Supply curve shifts
rightward
Technology Improves Increase in supply
Number of Increases
sellers
expectation Increase in future Decrease in current supply Supply curve shifts
price leftward