Chapter 3

The graphical
representation of the
demand schedule
is the demand curve.

Why does quantity demanded go down as price goes up?

There are mainly two reasons:
People substitute lower priced goods for higher priced goods
(if price of beef goes up many people substitute beef by mutton)
If price of a good increases (decreases), relative income falls
and people tend to consume less.

Individual Demand curve and market demand

curve
Individual demand curve: presents the price-quantity demand combination of
a particular good for a single buyer
Market demand curve: add individual demand curves
Market demand schedule: derived by adding the quantities demanded at
each price. For example in the following table at price 11 market demand is 11.

From market demand schedule we can draw marker demand curve. Market
demand curve is downward sloping like the individual demand curve.
Table 2 Market Demand Schedule for Good X
Price ($)
15
13
11
10

Jones
1
3
5
6

Smith

Market= Jones + Smith

2
3
4
7
6
11
7
13

Factors
Income

Normal good

Change in the
factors
Income rises
Income falls

Example: CDs
Inferior good
Income rises
(example: baked beans) Income falls

Neutral good (example: Income rises

toothpaste)
Income falls
Prices of related goods Substitutes (Coca-Cola Price of Pepsi-Cola
and Pepsi-Cola
rises
Price of Pepsi-Cola
falls
Complements (tennis Price of tennis rackets
rackets and tennis
rises
balls)
Price of tennis rackets
falls
Number of buyers
Increases
Decreases
Expected future price
increase
Decrease

Price

Increase
Decrease

Change in Demand
Demand increases
Demand falls

Change in demand
curve
Shifts right
Shifts left

Demand falls
Demand increases

Shifts left
Shifts right

Demand remains same

Does not shift

Demand remains same

Does not shift

Demand for Coca-Cola

increases
Demand for Coca-Cola
decreases
Demand for tennis balls
decreases
Demand for tennis balls
increases
Demand increases
Demand decreases
Current demand
increase
Current demand
decrease
Decrease in quantity
demand
Increase in quantity
demand

Demand curve for

Coca-Cola shifts right
Demand curve for
Coca-Cola shifts left
Demand curve for
tennis balls shifts left
Demand curve for
tennis balls shifts right
Shifts right
Shifts left
Shifts right
Shifts left

Movement along the

curve
Movement along the
curve

Normal goods: A good the demand for which rises (falls) as

income rises (falls). Example: DVD
Inferior good: A good demand for which falls (rises) as income
rises (falls). Example: baked beans
Neutral good: A good demand for which does not change as
income rises or falls. Example: tooth paste

Substitutes: Two goods that satisfy similar needs or desire. If two

goods are substitutes, the demand for one rises as the price of the
other rises. Example : Pepsi-Cola and Coca-Cola
Complements: Two goods that are used jointly in consumption. If
two goods are complements, the demand for one rises as the price of
the other falls. Example: tennis rackets and tennis balls

Factor
Price

Prices of
inputs

Change in the
factor
increases

Change in supply/
quantity supplied
Increase in quantity
supplied

Decreases
Increases

Decrease in supply

Decreases

Increase in supply

Technology
Improves
Increase in supply
Number of
Increases
sellers
expectation Increase in future Decrease in current supply
price

Supply curve
Movement along the curve
from left to right

Supply curve shifts

leftward
Supply curve shifts
rightward

Supply curve shifts

leftward