Demand & goods - Demand and Supply

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Demand & goods

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Notes:

Demand & Goods Terminology

When you demand something, you assume 3 things:
  1. You want it.
  2. You can afford it.
  3. You plan to buy it.

Quantity Demanded: is the amount of good or service that consumers plan to buy during a time period at a specific price.


Normal Goods: goods where quantity demanded goes up when income rises and vice versa.

Inferior Goods: goods where quantity demanded goes down when income rises.

Substitutes: goods that can be used as replacements for one another. When the price of one good increases, people switch to the substitutes.

Perfect Substitutes: substitutes that are almost identical to each other.

Complements: goods that “go together”. A decrease in price of one good results in an increase in quantity demanded for the other, and vice versa. (example: pencils and erasers)

Law of Demand and Demand Curve

Law of Demand: quantity demanded of the good changes as the price of the good changes. As one increases the price of the good, the quantity of the good decreases and vice versa.

The demand curve function is P = a - bQDbQ_{D}, where
  1. P is the price of the good or service
  2. QDQ_{D} is the number of quantity demanded
Demand curve function

The demand is downward sloping because of two reasons: substitution effect and income effect.

Substitution Effect: when the relative price of a good or service rises, people will try to look for substitutes. Once the substitute they are looking for is found, people buy it. Thus, the quantity of the good or service decreases.

Income Effect: The price of the good or service rises, so people cannot afford all the things they bought previously. So, the quantity of the demand of the good or service decreases.

Change in Demand

The demand curve can either shift rightward or leftward.

Reasons why demand curves can shift:
  1. Price of substitute goods: If price of substitute good increases, demand for the original good increases and vice versa
  2. Expected future prices: If the price of the good is expected to increase in the future, they will buy more now, causing the demand to increase.
  3. Income: People buy more normal goods if they have more income. This is the opposite for inferior goods.
  4. Expected future income: If income is expected to increase in the future, buyers will increase the demand for the quantity now.
  5. Population: the larger the population, the bigger the demand
  6. Preferences: People with the same income has different demands for the good.
Demand curve shift rightward or leftward
  • Intro Lesson
    Demand & Goods Overview:
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Demand & goods

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