Supply and demand

Supply and demand

-quantity demanded, demand function and demand curve

-market demand

-quantity supplied, supply function and supply curve

-The market supply

When we consider demand, what are the possible factors that will affect your decision about how much to purchase this good? For example, cars. Price of cars, your income, price of gas, price of bus ticket, preference, etc. At this point, we will consider about the first four factors. The other factors are not that important to economists, maybe yes to psychologists.

Demand function is the relationship between quantity demanded and all the factors.

Q=f(p,pg,pt,y)

Demand curve is the relationship between quantity and its own price, given all other factors constant. It basically says what will happen to the quantity you purchase when price of that good goes up (or down). For most of goods, when price goes up, people buy less of that good. So demand curve has a negative slope, and this is called LAW OF DEMAND.

Now, how do we derive demand curve from demand function?

Notice that demand curve doesnt say anything about any other factors except for its own price. So what we do is to give any number to all those other factors and the we find the demand curve.

For example,

Q=171-20p-20pg+3pt+2y

Then let pg=4, pt=1/3,y=12.5, and we can plug all those numbers into the above equation, then we get

Q=171-20p-20*4+3*1/3+2*12.5

=117-20p

The above equation is called demand curve. If we put it into a graph, then it looks like

When price goes up, you want to buy less of that good. It is a movement along the demand curve. We call the demand for a given price as quantity demanded.

Now lets look what will happen if other factors change. For example, if pg increase.

When pg goes up to 5, then demand curve becomes

Q=171-20p-20*5+3*1/3+2*12.5

=97-20p

So for a given price p, the quantity demanded actually goes down when pg goes up. The demand curve will shift to the left. Notice that pg and p have the same effects on Q. And this means that car and gas are complementary goods. Complementary goods means that when you consume more of one good, you have to consume more of the other one. Those two goods are like a bundle. They have to go together. There are a lot of examples of complementary goods. For example, milk and cereal, camera and film.

What will happen if pt goes up?

When pt goes up to 1, demand curve becomes

Q=171-20p-20*4+3*3+2*12.5

=150-20p

So for a given price p, the quantity demanded goes up when pt goes up. Demand curve shift to the right. Here, bus price has a positive effect on the amount of cars you purchase. And these two goods are called substitution goods. They mean that when you consume more of this good, you consume less of the other good. They give the same usage.

So, if dQ/d(other price)>0, then substitutes,

If dQ/d(other price)