CHAPTER 4 definitions

Demand Supply and prices

The quantity of a good or service that consumers are willing and able to
Demand:
purchase at various prices within a given period.
Individual The quantity of a good or service that a single consumer is willing and
Demand able to buy at various prices within a given period.
Market The sum of all individual demands for a particular good or service at
Demand: various prices within a given period.
Goods that are consumed together, so when the price of one increases,
Complements:
the demand for the other decreases.
Goods that can be used in place of each other, so when the price of one
Substitutes:
increases, the demand for the other increases.
States that, all else being equal, as the price of a good or service
Law of Demand:
decreases, the quantity demanded increases, and vice versa.
A graphical representation showing the relationship between the price
Demand Curve:
of a good and the quantity demanded by consumers.
Change in Movement along the demand curve due to a change in price, holding all
Quantity other factors constant.
Demanded:
Shift of Demand Movement of the entire demand curve due to a change in factors other
Curve: than price, such as income or preferences.
Goods for which demand increases when income increases, and vice
Normal Goods:
versa.
Goods for which demand decreases when income increases, and vice
Inferior Goods:
versa.
The prices of goods or services compared to each other, influencing
Relative Prices
consumer choices.
Substitution When consumers switch to a similar but cheaper good as the price of
EEect: another good rises.
When a change in price aAects the purchasing power of consumers'
Income EEect:
income, influencing their demand for goods or services.
The quantity of a good or service that producers are willing and able to
Supply:
oAer for sale at various prices within a given period.
Individual The quantity of a good or service that an individual producer is willing
Supply: and able to oAer for sale at various prices within a given period.
Supply A table showing the relationship between the price of a good and the
Schedule: quantity supplied by producers.
Graphical representation showing the relationship between the price of
Supply Curve:
a good and the quantity supplied by producers.
 The point where the quantity demanded equals the quantity supplied in
Equilibrium:
the market.
Excess When the quantity demanded exceeds the quantity supplied at a given
Demand: price.
When the quantity supplied exceeds the quantity demanded at a given
Excess Supply:
price.
Consumer The diAerence between what consumers are willing to pay for a good
Surplus: and what they actually pay.
Producer The diAerence between the price at which producers are willing to sell a
Surplus: good and the price they actually receive.
 CHAPTER 4 summary
Demand Supply and prices

4.1 Demand and supply: An introductory overview

• How households and firms interact: § Rent
§ Wages
® Households own FOP § Salaries
® Sell them to firms in factor markets and receive § Interest
§ Profit
® Firms combine these FOP to produce goods and services
® Sold in goods market
• Goods market : firms are suppliers and households the consumers , buying
with money obtained from selling factors of production
• Market economy : prices and quantities traded in goods market are determined
by interaction of supply and demand
• Supply and demand interact to determine the equilibrium quantity in the
market.
• Households determine demands
• Interaction of supply and demand determine the price (P1) and quantity (Q1)
• Goods market and firms determine the supply.

Goods
market

P1

Supply Q1 Demand
goods and goods and
services sevices

Natural resources, labour,capital

and entrepreneurship sold to
firms
Rent, wages and salaries,
Firms interest and profit paid to Househol
households
ds
 4.2 Demand
• Flows from descisions about which wants to satisfy
• Demand means that the consumer intends to buy the products and has the means to do
so. The quantities of a goods and service that potential buyers want to buy.
• DiArences between wants and demand:
• Demand is measured over a period of time (weekly,monthly,yearly) and it should be
specified when making a demand.
• Quantity bought or exchanged will depend on availability of service.
• Quantity demanded may be more, less or equal to quantity actually bought.
• Market demand : Consists the combined demand of all households in the market
• Determiners of quantity is the household plans to purchase in a particular period.
Wants: Demands :
• Unlimited desires or wishes for goods and• The quantities of a goods and service that
services potential buyers want to buy.
• Some wants cannot be satisfied • EAectively only if the consumer is able and
• Not enough means to satisfy wants willing to pay for goods and services.
• Enough means to satisfy demands as only
people interested and who have intent to
buy will receive it.
Needs : Claims:
• Needs refer to essential requirements or • Claims are assertions or demands made by
desires necessary for survival, well-being, or individuals or groups regarding their
fulfillment, often innate or fundamental to entitlements, rights, or expectations, often
human existence. based on perceived needs, obligations, or
legal principles.

1. Price of product or service :

® Lower price=larger amount of products per consumer willing to buy (ceteris paribus)
2. The prices related products:
® Households decisions about how many products to purchase depend on the price of
products
® Complements are goods that are used jointly
® Substitutes are goods that can be used instead of the good in question
3. Income of the consumer:
® Plans will be aAected by the consumers income
® Determines purchasing power
® Higher income= more purchasing power
4. Taste or preference of consumers :
® Descision are influenced by taste more liking to product = more buying of the product
2. Number of households:
® More households + greater number of people per households=greater demand of
product
• Factor that doesn’t determine demand is availability or supply of product.
• Consumers use information available to plan buying of products. When product quantity is
low , price rises and the low availability = no satisfaction to demand of quantity
• Availability of the market aAects the actual outcome of the market.
The quantity of goods demanded in a particular period of time depends on the price of the good,
price of related goods , income of households and number of consumers.

• 𝑄! = 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑖𝑛 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 Pg = prices of related goods

• 𝑃" = 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 Y = household income
• 𝑄! = 𝑓(𝑃" , 𝑃# , 𝑌 , 𝑇 , 𝑁 … ) T = taste of consumers
• Law of demand: N = Number of consumers
… = other influences
® Other things being equal , the higher price of a good,
The lower the quantity demanded.
• Demand curve
• When all other variables stay constant ( except for those made in the formula)
• Relationship is established through law of demand.

Price

Quantity
• No variable can be explained by another variable , always uses ceteris parabus
• How laws of demand can be expressed
® Using words
® Using numbers
® Using gra[phs
® Using symbols
• Movements along the demand curve: change in quantity demanded:
® Movement along the curve: Relates to slope of the curve ( blue to pink )

Price
Price of product change =
change in quantity demanded

Quantity
 ® Shift of a curve : Position of intercept.
Substitutes:

Price of product increases , greater

Price of quantity of substitute will be produced as
Substitut the demand therefore will rise. (rightward
e shift)
Decrease in the price of substitute will
lead to decrease in demand for normal
good (leftward shift)
Quantity of
substitute
Complements: Joint goods to satisfy want ( game consoles + games )
 4.3 Supply:
• Quantities of a goods or service that producers plan to sell at each possible
price during a certain period.
• Quantity supplied during specific period may be greater than , equal to or
smaller than the quantity eventually sold.
• Expressed in words , shedules , curves or equations
• Market supply
® Combined result of decisions of all individual suppliers of product in question
® Determiners of supply of a product:
1. Price
2. Price of alternative
3. Expected future costs
4. State of technology
Other determenants :
1. Government policy
2. Unexpected events
3. Join products and by products
4. Products/ technology
• Quantity of a good supplied in particular period is a function of the price of the
good, prices of factors pf production, expected future prices and state of
technologies.
• Supply curve
• Expressing supply:
® Using words
® Using numbers
® Using graphs
® Using symbols
• Movement along the curve :

b
Price
a

Quantity
 4.4 Market equilibrium:
• Point where the quantity demanded by consumers equals the quantity
supplied by producers.
• At equilibrium, there is no surplus or shortage of goods in the market.
• Equilibrium price: price at which quantity demanded equals quantity supplied.
• Equilibrium quantity: quantity of goods or services bought and sold at the
equilibrium price.
• Changes in supply & demand causes shifts in equilibrium price and quantity.
• If the price is above equilibrium, there will be a surplus, leading to downward
pressure on prices.
• If the price is below equilibrium, there will be a shortage, leading to upward
pressure on prices.
• Equilibrium is a dynamic concept, constantly adjusting to changes in market
conditions.
 4.5 Consumer surplus and producer surplus:
• Consumer Surplus:
® The diAerence between what consumers are willing to pay for a good or service and
what they actually pay.
® Represents the benefit consumers receive from purchasing a good or service at a price
lower than their maximum willingness to pay.
® Calculated as the area between the demand curve and the price consumers actually
pay.
® Indicates the value consumers gain from participating in a market transaction.
® Higher consumer surplus suggests greater overall satisfaction and utility for consumers.

• Producer Surplus:
® The diAerence between the price received by producers for a good or service and the
minimum price they are willing to accept.
® Represents the benefit producers receive from selling a good or service at a price higher
than their minimum acceptable price.
® Calculated as the area between the supply curve and the price producers receive.
® Reflects the profit and additional value gained by producers in a market transaction.
® Higher producer surplus indicates greater profitability and incentive for producers to
supply goods or services.
• Consumer and producer surplus at market equilibrium: