Demand, Supply, and Price Determination in Microeconomics

Chapter 3: Demand, Supply, and Price

Chapter Outline and Learning Objectives

This chapter introduces the foundational concepts of demand, supply, and price determination in microeconomics. By the end of this chapter, students should be able to:

• List the factors that determine the quantity demanded and supplied of a good.

• Distinguish between shifts of and movements along the demand and supply curves.

• Explain how market prices are determined and how equilibrium is affected by changes in demand and supply.

Demand

Quantity Demanded

The quantity demanded of a product is the total amount that consumers desire to purchase in a given time period. It is important to distinguish between:

• Quantity demanded: The desired amount consumers are willing to buy at a specific price.

• Quantity bought (or exchanged): The actual amount purchased in the market.

• Flow vs. Stock: Quantity demanded is a flow (measured over a period of time), not a stock (measured at a point in time).

Quantity Demanded and Price

There is a fundamental relationship between the price of a product and the quantity demanded, known as the law of demand:

• Law of Demand: Ceteris paribus (all else equal), as the price of a product increases, the quantity demanded decreases, and vice versa. This is a negative relationship.

• Reason: Consumers have alternative products to satisfy their wants. A lower price makes a product more attractive relative to substitutes, increasing its quantity demanded.

Demand Schedules and Demand Curves

A demand schedule is a table showing the quantity demanded at various prices. A demand curve is a graphical representation of the demand schedule, typically downward sloping from left to right.

Reference Point	Price ($ per bushel)	Quantity Demanded (thousands of bushels per year)
U	20	110
V	40	85
W	60	65
X	80	50
Y	100	40

Example: The table above shows a demand schedule for apples. As price increases from $20 to $100, the quantity demanded falls from 110,000 to 40,000 bushels per year.

Shifts in the Demand Curve

While a change in price causes a movement along the demand curve, changes in other variables shift the entire demand curve:

• Increase in demand: Rightward shift of the demand curve.

• Decrease in demand: Leftward shift of the demand curve.

Factors that shift the demand curve:

• Consumer's income

• Prices of other goods (substitutes and complements)

• Consumers’ preferences

• Population

• Significant changes in weather

Price ($ per bushel)	Quantity Demanded (D0) ($50,000 income)	Quantity Demanded (D1) ($60,000 income)
20	110 (U)	140 (U')
40	85 (V)	115 (V')
60	65 (W)	95 (W')
80	50 (X)	80 (X')
100	40 (Y)	70 (Y')

Example: An increase in average income shifts the demand curve for apples to the right, increasing quantity demanded at every price.

Movements Along vs. Shifts of the Demand Curve

• Movement along the demand curve: Caused by a change in the price of the good itself.

• Shift of the demand curve: Caused by changes in other determinants (income, preferences, etc.).

Graphical Representation: A rightward shift indicates an increase in demand; a leftward shift indicates a decrease in demand.

Additional info: The demand curve is typically drawn with price on the vertical axis and quantity on the horizontal axis. The negative slope reflects the law of demand.