Demand and Supply


Demand and Supply

What makes the prices of oil and petrol double in just one year? Will the price of petrol keep on rising? Are the oil companies taking advantage of people?
Some prices rise, some fall, and some fluctuate. This chapter explains how markets determine prices and why prices change.

Market and Prices
A market is any arrangement that enables buyers and sellers to get information and do business with each other. A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price. The money price of a good is the amount of money needed to buy it. The relative price of a good—the ratio of its money price to the money price of the next best alternative good—is its opportunity cost.

If you demand something, then you

1. Want it,
2. Can afford it, and 3. Have made a definite plan to buy it. Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy. The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price.

The Law of Demand

Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and vice versa.

The law of demand results from

 Substitution effect
when the relative price (opportunity cost) of a good or service rises, people
seek substitutes for it, so the quantity demanded decreases.

 Income effect
when the price of a good or service rises relative to income, people cannot
afford all the things they previously bought, so the quantity demanded decreases.

A Demand Schedule and Curve for Energy Bars

A demand curve is also a willingness-and-ability-to-pay curve. Willingness to pay measures marginal benefit.

Movement Along the Demand Curve

When the price of the good changes and everything else remains the same, the quantity demanded changes...