Demand and the Law of Demand

• Markets are institutional arrangements facilitating the exchange of goods and services and require demand for products and a willingness by producers to supply them

Demand

• Demand is the relationship between quantity and price.
• It describes quantities of goods or services consumers are willing and able to purchase at various prices at a given time.
• Market demand equals the sum of all individual demand.

Law of Demand

• The Law of Demand describes the rationing effect of prices.
• It states that with all other factors being constant, the quantity of the product that consumers are willing and able to buy increases.
• Quantity demanded is the number of goods individuals are willing to purchase at a specific price during a specific time.
• A demand schedule is a table displaying the quantities of a product that would be purchased at different prices at a specific time and place.
• A demand curve is a graph that shows the relationship between price and quantity demanded.
• Change in quantity demanded involves a shift from one point to another on the same demand curve due to a change in the product's price.

Determinants of Demand

• Consumer taste and preference
• Consumer's income
• Population
• Prices of related goods
• Expectations of future prices

Elasticity of Demand

• Elasticity of Demand describes how much a price change impacts quantity demanded.
• It equals the ratio of the percentage change in quantity demanded to the percentage change in price.
• Determinants of the Elasticity of Demand
  • Luxuries vs. necessities
  • Proportion of income
  • Sustainability
  • Time

Supply

• Supply is defined as the amount of items sellers are willing and able to sell at different prices during a period.
• Market supply simply equals the sum of all individual supply.
• A supply schedule displays the quantities of items sellers offer at different prices.

Supply Curve

• A supply curve illustrates the data in the supply schedule and typically slopes upward from left to right.
• The Law of Supply says that sellers will offer more of an item at a higher price and less at a lower one.
• Quantity supplied signifies the number of goods individuals are willing and able to sell at a particular price.
• Change in quantity supplied refers to movement along a supply curve, that is directly caused by a change in the price.

Elasticity of Supply

• Measured by the ratio of proportionate change in quantity supplied to the proportionate change in price.
• High elasticity means supply is sensitive to price changes, while low elasticity indicates the opposite.
• Zero elasticity indicates no relationship with price.
• Determinants of the Elasticity of Supplied
  • Limited amount of raw materials
  • Difficulty of producing good
  • Time period
  • Production surplus
  • Inventories

Market Equilibrium

• Market equilibrium is a condition where the market price is set through competition such that the quantity of goods or services purchased by buyers equals the quantity produced by sellers.
• An excess in quantity demanded leads to a price increase until demand and supply are equal.