MANAGERIAL ECONOMICS 3:00-6:00PM

CHAPTER 2 BRIEFER

Forces of demand and supply representing the aggregate influence of self-interested

buyers and sellers on price and quantity of the goods and services offered in a market. In
general, excess demand causes prices and quantity of supply to rise, and excess supply
causes them to fall.

The law of demand states that the higher the price of a product, the fewer people will
demand that product, that is, demand for a product varies inversely with its price, all other
factors remaining equal. Factors other than a good’s price which affect the amount
consumers are willing to buy are called the non-price determinants of demand. The law of
demand expresses the relationship between prices and the quantity of goods and
services that would be purchased at each and every price. In other words, the higher the
price of a product, the lower the quantity demanded.

Substitutes are goods that satisfy similar needs and which are normally consumed in
place of each other. As the price of one substitute declines, demand for the other
substitute will decrease. Butter and margarine are close substitutes. If the price of butter
goes up, then people will tend to substitute margarine for butter.

Complementary goods are those that are normally consumed together (e.g., cars
and tires). An increase in the price of a product will lead to the increase in demand for its
complement while a decrease in the price of a product will decrease demand for its
complement.
 Talking about quantity demanded, there are two ways one of a particular product can
change. First, according to the law of demand a change in price leads to a movement
along the original demand curve and results in a change in the quantity demanded, that is,
more will be purchased but only at a lower price. Second, when one of the non-price
factors changes (e.g., a change in income) there will be a change in demand. This
change causes a shift of the demand curve either outward or inward in response to a
change in a condition other than the good’s price. It means that more or less will be
purchased at the same price.
All of the non-price determinants (changes in the size of the market, income for the
average consumer, population size, the prices and availability of related goods,
consumer preferences) are directly related to consumers. In other words, at any given
price, consumers will be willing and able to purchase either more or less.

Economists often look at things graphically. A demand curve shows an inverse

relationship between the price and the quantity demanded. The demand curve
represents the quantities of a product or service which consumers are willing and able to
buy at various prices, all non-price factors being equal. The demand curve slopes
downward from left to right based on the law of demand. Or to put it another way, a
demand curve shows that the quantity demanded is greater at a lower price and lower at
a higher price.

Increased demand can be represented on the graph as the curve being shifted to the
right, because at each price, a greater quantity is demanded. An example of this would
be more people suddenly wanting more a particular product. On the other hand, if the
demand decreases, the opposite happens. Decreased demand can be represented on
the graph as the curve being shifted to the left, because at each price the quantity
demanded is less. It means that fewer people want to buy this product.The difference
between change in demand and quantity demanded is subtle but important. If the
demand of ice cream goes up in summer it is because consumptive demand has truly
increased, clearly it is hot. In this case the business can most likely raise prices without
suffering a cut in sales. This is a change in the quantity demanded. In winter the business
incurs a sales fall at the same price. The only way out of increasing sales is to reduce the
price. As a result of a price cut the increased sales of ice cream means that consumer
demand has artificially been manipulated. In reality, actual demand is low but extra
efforts have to be made to increase sales. This leads to a change in demand.