Part 2:

THE PRICE SYSTEM AND THE

MICROECONOMY
Chapter 2: The Nature of Demand
Key Terms
• Basic economic problem? SCARCITY

• Market
• Where buyers and sellers get together to trade
Key Terms
• Price Mechanism
• The means of allocating resources in a market economy
Functions of Prices
• A signaling function by indicating surpluses or
shortages in a market
• A rationing function by allocating resources among
alternative uses
• An incentive function by encouraging producers to
supply more or less of a good or service
Determination of Price
• How are prices determined in the market?

• Price of any goods and services are determined by the

interaction of demand and supply

• Equilibrium price: Qd = Qs

Qd Qs
Demand
Def : the quantity of a product that purchasers/buyers/consumers
are willing and able to buy at various prices per period of time
Determinants of Demand
Law of demand: quantity demanded varies inversely with the price

Assumption of ceteris paribus: all other factors remain constant

 Individual Demand
Viktor’s Demand schedule
Price of rice Quantity
per kilo ($) demanded
(kilos per
month)
$5 60
$ 10 50
$ 15 40
$ 20 30
$ 25 20
$ 30 10
Market Demand Schedule
Price of rice Quantity Quantity Quantity Market
per kilo ($) demanded demanded demanded demand
(kilos per (kilos per (kilos per (kilos per
month) month) month) month)
Viktor Nate Tina
$5 60 40 30 130
$ 10 50 35 25 110
$ 15 40 30 20 90
$ 20 30 25 15 70
$ 25 20 20 10 50
$ 30 10 15 5 30
Market Demand Curve
Factors influencing Demand
• Income
• Normal goods: Demand rises as Income rises and vice versa

• Inferior goods : Demand falls as Income rises

Factors influencing Demand
• Price and availability of related products
• Substitutes

• Complement
Factors influencing Demand
• Fashion, taste and attitudes
• Expectations of future prices
• Size, age and gender
Shifts in Demand Curve
When there is an increase in income, a consumer will be able to
purchase more, thus demand curve will shift, and vice versa
Price

Quantity
Movement along the Demand Curve

Price

Quantity
Demand and Substitute Goods
Draw the demand curves for Koko Crunch and Corn flakes when there is an increase
in the price of Koko Crunch.
Demand and Complement Goods
Draw the demand curves for Koko Crunch and milk when there is an increase in the
price of Koko Crunch