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Law of Demand

Law of Demand. A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good. An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.

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Law of Demand

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  1. Law of Demand • A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good. • An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.

  2. Change in Quantity Demanded Price An increase in price causes a decrease in quantity demanded. P1 P0 Quantity Q1 Q0

  3. Change in Quantity Demanded Price A decrease in price causes an increase in quantity demanded. P0 P1 Quantity Q0 Q1

  4. Changes in Demand • Change in Buyers’ Tastes • Change in Buyers Incomes • Normal Goods • Inferior Goods • Change in the Number of Buyers • Change in the Price of Related Goods • Substitute Goods • Complementary Goods

  5. Change in Demand An increase in demand refers to a rightward shift in the market demand curve. Price P0 Quantity Q0 Q1

  6. Change in Demand A decrease in demand refers to a leftward shift in the market demand curve. Price P0 Quantity Q1 Q0

  7. Law of Supply • A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good. • An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.

  8. Change in Quantity Supplied A decrease in price causes a decrease in quantity supplied. Price P0 P1 Quantity Q1 Q0

  9. Change in Quantity Supplied An increase in price causes an increase in quantity supplied. Price P1 P0 Quantity Q0 Q1

  10. Changes in Supply • Change in Production Technology • Change in Input Prices • Change in the Number of Sellers

  11. Change in Supply An increase in supply refers to a rightward shift in the market supply curve. Price P0 Quantity Q0 Q1

  12. Change in Supply A decrease in supply refers to a leftward shift in the market supply curve. Price P0 Quantity Q1 Q0

  13. Market Equilibrium • Market equilibrium is determined at the intersection of the market demand curve and the market supply curve. • The equilibrium price causes quantity demanded to be equal to quantity supplied.

  14. Market Equilibrium Price D S P Quantity Q

  15. D1 P1 Q1 Market Equilibrium Price D0 S0 An increase in demand will cause the market equilibrium price and quantity to increase. P0 Quantity Q0

  16. D1 P0 P1 Q1 Q0 Market Equilibrium Price D0 S0 A decrease in demand will cause the market equilibrium price and quantity to decrease. Quantity

  17. S0 S1 P1 Q1 Market Equilibrium Price An increase in supply will cause the market equilibrium price to decrease and quantity to increase. D0 P0 Quantity Q0

  18. S1 S0 P1 P0 Q1 Q0 Market Equilibrium Price A decrease in supply will cause the market equilibrium price to increase and quantity to decrease. D0 Quantity

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