This chapter introduces students to the important concepts of demand and supply. The chapter uses examples to illustrate how changes in non-price factors impact demand, supply, and the resulting market equilibrium. Demand is the relationship between price and the quantity demanded of a good by cons...
Chapter 2: Demand, Supply and Equilibrium Prices 6
CHAPTER 2: DEMAND, SUPPLY AND EQUILIBRIUM
PRICES
OVERVIEW
This chapter introduces students to the important concepts of demand and supply. The chapter uses
examples to illustrate how changes in non-price factors impact demand, supply, and the resulting
market equilibrium. Demand is the relationship between price and the quantity demanded of a good
by consumers in a given period of time, all other factors held constant. Supply is the relationship
between price and the quantity supplied of a good by producers in a given period of time, all other
factors held constant. The discussion uses graphical and algebraic methods.
OUTLINE OF TEXT MATERIAL
I. Introduction (outlines the chapter content and defines the main concepts: Demand and
Supply)
A. Demand: Functional relationship between the price and quantity demanded of goods
and services by consumers in a given period of time, all else equal.
B. Supply: Functional relationship between the price and quantity supplied of goods
and services by producers in a given period of time, all else equal.
C. Managers need to understand demand and supply to develop competitive strategies
and respond to the actions of competitors.
D. The chapter covers verbal, graphical and mathematical analyses of demand and
supply.
II. Demand
A. Demand: Functional relationship between the price and quantity demanded of goods
and services by consumers in a given period of time, all else held constant.
, Chapter 2: Demand, Supply and Equilibrium Prices 7
B. Non-price factors influence demand, causing either an increase or a decrease in
demand. These factors are the following.
1. Tastes and Preferences
(a) A favorable change in the taste for good X increases its demand.
2. Income
(a) Normal Good: A product whose demand will increase with an
increase in income. Example
(b) Inferior Good: A product whose demand will decrease with an
increase in income. Example
.
3. Prices of Related Goods
(a) Substitute Goods: Products that can be used in place of one another.
An increase in the price of a substitute good, Y, causes an increase in
the demand for good X. examples
(b) Complementary Goods: Products that are used together. A decrease
in the price of a complementary good, Y, causes an increase in the
demand for good X. examples
(Prices of personal computers dropped, this led to an increased demand for
printers and cartridges)
Teaching Tip: Make sure the students understand the difference between substitute
goods and complementary goods. The examples used in the text are iPods and
laptops that serve as substitutes for wristwatches, palladium as a cheap substitute
for platinum and personal computers being complementary to printers and printer
cartridges. Ask the students to come up with other examples of substitute goods and
complementary goods.
4. Future Expectations
An expected increase in the future price of good X will increase its current
demand.
5. Number of Consumers
An increase in the number of buyers of good X will increase the market
demand for X.
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