II.
Supply and Demand Dynamics Supply and Demand Dynamics The Law of Demand and Its Determinants Law of Demand: This law states there is an inverse relationship between price and quantity demanded.
As price rises, quantity demanded decreases; as price falls, quantity demanded increases.
Demand vs.
Quantity Demanded: A change in price affects the quantity demanded (a movement along the demand curve).
A change in a determinant of demand affects demand itself (a shift of the entire curve).
Downward Sloping Curve: The demand curve slopes downward due to the law of demand and the principle of diminishing marginal utility, which states that the satisfaction gained from consuming each additional unit of a good decreases.
Determinants of Demand: These six factors shift the demand curve: Determinant Description Impact on Demand Curve Taste or Preference Changes in consumer preferences for a good.
Shifts right for increased preference, left for decreased preference.
Income Changes in consumer income.
Affects normal goods (demand increases with income) and inferior goods (demand decreases with income).
Shifts right for normal goods with higher income; left for inferior goods.
Substitution Effect Consumers switch to a cheaper alternative if the price of a desired good becomes too high.
Shifts left if a substitute’s price falls; right if it rises.
Price of Complements Change in the price of goods used together (e.g., hot dogs and buns).
Shifts left if a complement’s price rises; right if it falls.
Population An increase or decrease in the number of consumers.
Shifts right with population growth, left with decline.
Consumer Expectations Anticipation of future price changes.
Shifts right if a future price increase is expected; left if a future price drop is expected.