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Demand and Supply Explained- Macro Topic 1.4 (Micro Topic 2.1)

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About this unit

This unit begins the study of product markets: the markets for the goods and services produced. In this unit, you will begins the study of product markets, focusing on the supply and demand model. Students will be introduced to the determinants of demand and supply, market equilibrium, and how changes in equilibrium occur when supply and demand change. Then, build on the supply and demand model to deepen your economics toolkit with the concepts of elasticity, consumer and producer surplus, and the impact of government policies.

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Supply and Demand | AP®︎/College Microeconomics | Economics | Khan Academy

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This unit begins the study of product markets: the markets for the goods and services produced. In this unit, you will begins the study of product markets, focusing on the supply and demand model. Students will be introduced to the determinants of demand and supply, market equilibrium, and how changes in equilibrium occur when supply and demand change.

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Define (using graphs as appropriate) key terms and factors related to consumer decision making and the law of demand.

Explain (using graphs as appropriate) the relationship between price and quantity demanded and how buyers respond to incentives and constraints.

Explain (using graphs as appropriate) buyers’ responses to changes in incentives and constraints.

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Individuals and firms respond to incentives and face constraints.

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A well-defined system of property rights is necessary for the market system to function well.

Economic agents respond to incentives.

Individuals often respond to incentives, such as those presented by prices, but also face constraints, such as income, time, and legal and regulatory frameworks.

The law of demand suggests that a change in the own-price causes a change in quantity demanded in the opposite direction and a movement along a demand (marginal benefit) curve.

The conceptual relationship between price and quantity stated by the law of demand leads to downward-sloping demand curves explained by the income effect and substitution effect and/or by diminishing marginal utility.

The market demand curve (schedule) is derived from the summation of individual demand curves (schedules).

Changes in the determinants of consumer demand can cause the demand curve to shift.

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APMic Unit 2 Lesson 1 - Demand and Demand Determinants (Curve Shifters)

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Start studying APMic Unit 2 Lesson 1 - Demand and Demand Determinants (Curve Shifters). Learn vocabulary, terms, and more with flashcards, games, and other study tools.

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The Law of Demand states that the quantity demanded for a good rises as the price falls, with all other things being equal.The other-things-being-equal assumption is very important in law because the demand for goods also varies with many factors other than price. It is the inverse relationship between price and quantity demanded. There are some exceptions to this law. The Law holds true because of two factors:

1. The Substitution Effect

If the price of a substitute of good X goes up, then good will become relatively cheaper and people will move towards good X. There will be an increase in demand for good X. Example: If we consider Coke and Pepsi to be good substitutes for each other, then, when the price of Coke goes up, then more people will more likely purchase Pepsi.

2. The Income Effect

If the price of good X rises, then consumer's purchasing power will drop and then people will tend to buy less of good X will the same income. This means that when a good becomes more expensive then people can afford less of it.

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Introduction to Demand | Intelligent Economist

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The Law of Demand states that the quantity demanded for a good rises as the price falls, with all other things being equal.The other-things-being-equal assumption is very important in law because the demand for goods also varies with many factors other than price. It is the inverse relationship between price and quantity demanded.

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The Substitution Effect is the effect of a change in the relative prices of goods on consumption patterns. It is the economic idea that as either prices rise or income decreases, consumers substitute cheaper alternatives for more expensive goods

The substitution effect is harmful to economic prosperity overall because it limits the breadth of options and opportunities available to both consumers and producers.

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The Substitution Effect | Intelligent Economist

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The Substitution Effect is the effect of a change in the relative prices of goods on consumption patterns. It is the economic idea that as either prices rise or income decreases, consumers substitute cheaper alternatives for more expensive goods The substitution effect is harmful to economic prosperity overall because it limits the breadth of options and opportunities available to both consumers and producers.

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The Wealth Effect happens for psychological reasons. Consumers view themselves as more wealthy when their portfolios increase in value.

In other words, increases in the value of their assets causes consumers to feel more comfortable spending their money. Mentally, they conflate their increased net worth with an increase in their overall income, which predisposes them to spend more money, perhaps on unnecessary items like luxury goods.

Effects of a change in wealth

When the wealth of an individual or household increases, the following results are likely to occur:

Higher incomes from interest, rent, or dividends may result from greater wealth.

It becomes easier to withdraw equity from one's home via mortgage equity withdrawal, as well as to remortgage one's home.

The savings ratio (that is, the ratio of savings to disposable income) decreases. This is because, as their perception of their own wealth grows, people become more comfortable taking financial risks, spending their income, and borrowing money.

Rising house prices are likely to make banks more inclined to lend mortgages.

Governments that tax wealth will experience greater tax revenue.

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The Wealth Effect happens for psychological reasons. Consumers view themselves as more wealthy when their portfolios increase in value. In other words, increases in the value of their assets causes consumers to feel more comfortable spending their money.

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The demand curve shows what is the quantity demanded at any given price. It says that the lower the price of some good (as long as people still consider that thing "good" overall) the greater the quantity demanded. The cheaper something is, the more I want it. The more expensive it gets, the less of it shall I buy. We know this is true in two ways. One is introspection. Reflect and you will see that this is true for you too! The other is by adopting an evolutionary perspective. Imagine Jimmy B was different than everyone else. He is a "mutant", has a different genetic baggage than others. The more expensive would a good be, the more of it will he buy. Jimmy will soon run out of resources. But since Jimmy is in competition for resources with other men, Jimmy will have a lower chance than others to find a partner and pass his genes - make children that are like himself. Jimmy B dies without ancestors. Sometimes mutants appear but they don't last. In the long run we all behave like the demand curve says we do.

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Supply and Demand Terms | Microeconomics Videos

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What's the difference between a change in demand and a change in the quantity demanded? A change in demand refers to a shift in the demand curve - caused by factors such as income, population, etc. A change in quantity demanded refers to a movement along a fixed demand curve - caused by a change in price.

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A Deeper Look at the Demand Curve | Microeconomics Videos

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What are the horizontal and vertical methods for reading the demand curve? In this video, you'll learn the two methods using the concept of consumer surplus-the difference between the maximum price a consumer is willing to pay for a given quantity and the market price.

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Isn't whether a good is Normal or Inferior dependent on the economy as a whole, not just its own nature?

For example, if a population starts off very poor and there's a boom, demand for Hamburger Helper might go up because people can afford hamburger for the first time. Similarly, demand for Hamburger Helper might go down during a recession because people could no longer afford hamburger.

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The Demand Curve Shifts | Microeconomics Videos

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What causes the demand curves to shift? An increase or decrease in demand means an increase or decrease in the quantity demanded at every price. In this video, you'll see how changes in income, prices of substitutes, and changes in taste can all shift the demand curve.

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What is a demand curve? A demand curve illustrates on a graph how much of a particular good or service people are willing to buy as its price changes.

When the price for a good or service goes down, demand tends to increase. That's why stores can look a little crazy on Black Friday: retailers cut prices to ensure that they'll be "in the black" for the year and shoppers load up on presents for Christmas.

On a graph, the demand curve slopes downward with prices indicated on the vertical axis and the quantity demanded on the horizontal axis. Every good or service has its own demand curve, but they function the same way.

Oil is a crucial good throughout the world, so let's take a look at its demand curve. When the price for oil is high, let's say $55 per barrel, the quantity demanded might be five million barrels. Oil has a lot of uses, but some of them are considered low-value and there are substitute goods available. So if the price of oil is on the high end, demand for these low-value uses will be lower.

However, oil has a number of high-value uses without many substitutes. For example, planes requires oil for jet fuel. At that high price of $55 per barrel, you're still going to need to pay up in order to fly a plane. But at that same price, drivers may opt to carpool, switch to a vehicle that can use ethanol or a hybrid car, or take fewer trips to avoid the high price of gas.

Now, when oil drops to $20 or even $5 per barrel, many more barrels are demanded. Suddenly, it makes sense to use oil instead of finding substitute goods or economizing for oil's low-value uses. We'll cover more details in the video and demonstrate graphing the demand curve. But demand is only one piece of the puzzle for this first section. The

supply curve and the equilibrium price and quantity are up next.

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The demand curve demonstrates how much of a good people are willing to buy at different prices. In this video, we shed light on why people go crazy for sales on Black Friday and, using the demand curve for oil, show how people respond to changes in price.

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1. What is demand?

2. Why is demand downward sloping (3 reasons)?

3. What is the difference between a change in quantity demanded and a change in demand?

4. What are the non-price determinants of demand?

5. Assume that a consumer spends all of his income on two normal goods. If the price of one of the goods increases, use the substitution effect to describe what happens next.

6. Draw a properly labeled demand graph. Show the effect on the demand curve of an increase in income.

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An increase or decrease in any of these factors affecting demand will result in a shift in the demand curve. Depending on whether it is an inward or outward shift, there will be a change in the quantity demanded and price.

1. Normal Goods

When there is an increase in the consumer's income, there will be an increase in demand for a good. If the consumer's income falls then there will be a fall in demand.

2. Change in Preferences

If there is a change in preferences, then there will be a change in demand. For example: Yoga became mainstream a couple of years ago and health enthusiasts promoted its benefits. This led to an increase in demand for yoga classes.

3. Complimentary Goods

When there is a decrease in the price of compliments, then the demand for its compliments will increase. Complimentary goods are goods you usually buy together, like bread and butter, tea and milk. If the price of one goes up, the demand for the other good will fall. For example, if the price of yoga classes fell then there would be increase in demand for yoga mats.

4. Substitutes

An increase in the price of substitutes will affect the demand curve. Substitutes are goods that can be bought in place of the other like how Coca Cola & Pepsi are very close substitutes. If the price of one goes up, the demand for the other will rise. For example, if meditation classes became more expensive then there would be an increase in demand for yoga classes.

5. Market Size

If the size of the market increases, like if a country's population increases or there is an increase in the number of people in a certain age group then the demand for products would increase. For example if the birth rate suddenly skyrocketed, then there would be an increase in demand for baby products.

6. Price Expectations

When there is expectation of a price change, if people expect the price of a good to increase in the near future, then they are more likely to purchase sooner, which would increase demand for the product. For example, if people are expecting the price of a laptop to fall then they will delay their purchase till the price lowers.

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Factors Affecting Demand | Intelligent Economist

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An increase or decrease in any of these factors affecting demand will result in a shift in the demand curve. Depending on whether it is an inward or outward shift, there will be a change in the quantity demanded and price.