Lecture 4

The market demand refers to the sum of all the individual demands for a particular good. The market demand curve can be obtained by horizontally summing the individual demand curves.

If a change in some factor shifts the demand curve to the right, it corresponds to an increase in demand (and a shift to the left corresponds to a decrease in demand). Recall that we said “other things constant” while stating the law of demand. What are these other things?

• Income - A normal good is a good for which the demand increases as consumer income increases. A good for which demand falls as income rises is called an inferior good.
• Prices of related goods - When a fall in the price of one good reduces the demand for another good, they are called substitutes. When a fall in the price of one good increases the demand of another, they are called complements.
• Tastes - If the tastes become more tailored towards the product, then demand increases. We don’t often try to explain tastes since they are heavily influenced by more psychological factors.
• Expectations - If expectations for the future increase, then demand increases (self-fulfilling expectations), even if there is no logical reason for the rise of expectation in the first place. For example, if we expect an increase in our income, we might save less now and spend more.
• Number of buyers - As the number of buyers increases, the demand increases.

It is important to note that changing the price of some good does not result in a shift of the curve, it merely means that we are moving along the curve.

Similar to the definitions for demand, we have various parameters related to supply - quantity supplied, the law of supply, supply schedule, supply curve, and market supply. The law of supply states that other things constant, the quantity supplied of a good rises when its price rises.