Definition: The relationship between the price of a good and the quantity that one consumer is willing and able to buy, ceteris paribus (all other factors unchanged).
2.1 Law of Demand
When price falls, the quantity demanded by the individual rises.
When price rises, the quantity demanded falls.
Result: a downward‑sloping demand curve.
2.2 Determinants of Individual Demand (shift factors)
Income – higher income → higher demand for normal goods; lower income → higher demand for inferior goods.
Prices of related goods
Substitutes: a fall in the price of a substitute shifts demand left (consumer switches).
Complements: a fall in the price of a complement shifts demand right (more of the original good is bought).
Tastes & preferences – fashion, advertising, health concerns, etc.
Expectations – of future prices, income or availability.
2.3 Movements vs. Shifts
Movement along the curve: caused by a change in the price of the good itself.
Shift of the curve: caused by a change in any of the four determinants above.
2.4 Individual Demand Curve
Graphical representation of an individual’s demand schedule (price on the vertical axis, quantity on the horizontal axis). The curve is normally straight‑line or gently curved downwards.
Diagram to be drawn: Individual demand curve (price vs quantity).
3. From Individual to Market Demand (Syllabus 2.2)
Market demand is the total quantity of a good that all consumers in a particular market are willing and able to purchase at each possible price, ceteris paribus.
It is obtained by **horizontally adding** the individual demand schedules of every consumer.
3.1 Constructing a Market Demand Schedule
Price ($)
Quantity demanded – Consumer A
Quantity demanded – Consumer B
Quantity demanded – Consumer C
Market Quantity Demanded
10
2
1
0
3
8
3
2
1
6
6
4
3
2
9
4
5
4
3
12
2
6
5
4
15
For each price, the market quantity demanded equals the sum of the three individuals’ quantities.
3.2 Market Demand Curve
Plot the market quantities from the table against price. The resulting curve is also downward‑sloping, representing the aggregate behaviour of all consumers.
Diagram to be drawn: Market demand curve derived from the table above.
3.3 Determinants of Market Demand
All individual‑demand determinants (income, related‑good prices, tastes, expectations).
Number of buyers: changes in population size, market entry or exit, demographic shifts.
4. Individual Supply (Syllabus 2.3)
Definition: The relationship between the price of a good and the quantity that one producer is willing and able to sell, ceteris paribus.
4.1 Law of Supply
When price rises, the quantity supplied by the individual increases.
When price falls, the quantity supplied decreases.
Result: an upward‑sloping supply curve.
4.2 Determinants of Individual Supply (shift factors)
Movement along the curve: caused by a change in the good’s own price.
Shift of the curve: caused by any of the determinants listed above.
4.4 Individual Supply Curve
Graph with price on the vertical axis and quantity on the horizontal axis; the curve slopes upwards.
Diagram to be drawn: Individual supply curve (price vs quantity).
5. From Individual to Market Supply (Syllabus 2.3)
Market supply is the total quantity that all producers in a market are willing and able to sell at each price, ceteris paribus. It is obtained by **horizontally adding** the individual supply schedules.
5.1 Example of a Market Supply Schedule
Price ($)
Supply – Firm X
Supply – Firm Y
Supply – Firm Z
Market Supply
2
1
0
0
1
4
2
1
0
3
6
3
2
1
6
8
4
3
2
9
10
5
4
3
12
5.2 Market Supply Curve
Plot the market‑supply quantities against price; the curve slopes upward.
Diagram to be drawn: Market supply curve derived from the table above.
6. Price Determination and Market Equilibrium (Syllabus 2.4)
Equilibrium price (Pe) – the price at which quantity demanded equals quantity supplied.
Equilibrium quantity (Qe) – the quantity bought and sold at Pe.
At any other price there is either a surplus (Qs > Qd) or a shortage (Qd > Qs).
6.1 Drawing the Equilibrium
Diagram to be drawn: Market demand and market supply curves intersecting at the equilibrium point (Pe, Qe). Label surplus and shortage regions.
6.2 Effects of Shifts
Change
Direction of Demand Curve
Direction of Supply Curve
Resulting Effect on Pe
Resulting Effect on Qe
Increase in consumer income (normal good)
Right
—
↑
↑
Decrease in input price
—
Right
↓
↑
More buyers enter the market
Right
—
↑
↑
Technological improvement
—
Right
↓
↑
Fall in price of a substitute
Left
—
↓
↓
7. Elasticity of Demand (Syllabus 2.2 – AO2 & AO3)
7.1 Price Elasticity of Demand (PED)
Formula: \[
\text{PED} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}
\]
Interpretation:
|PED| > 1 → elastic (quantity responds strongly to price).
|PED| = 1 → unit‑elastic.
|PED| < 1 → inelastic (quantity responds weakly).
Determinants of PED:
Availability of close substitutes – more substitutes → more elastic.
Proportion of income spent on the good – larger share → more elastic.
Definition of the market – narrowly defined goods are more elastic.
Time horizon – demand is more elastic in the long run.
7.2 Income Elasticity of Demand (YED)
\[
\text{YED} = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in income}}
\]
YED > 0 → normal good (demand rises with income).
YED < 0 → inferior good (demand falls as income rises).
YED > 1 → luxury good (highly responsive to income).
7.3 Cross‑Price Elasticity of Demand (XED)
\[
\text{XED} = \frac{\%\ \text{change in quantity demanded of Good A}}{\%\ \text{change in price of Good B}}
\]
XED > 0 → Goods are substitutes.
XED < 0 → Goods are complements.
XED ≈ 0 → Goods are unrelated.
7.4 Quick Calculation Example
Price of coffee falls from $4 to $3 and quantity demanded rises from 20 units to 30 units.
Percentage change in price = \(\frac{3-4}{4}\times100 = -25\%\)
Percentage change in quantity = \(\frac{30-20}{20}\times100 = +50\%\)
Markets allocate resources through the price mechanism; buyers and sellers interact to determine price and quantity.
Individual demand shows how one consumer’s quantity demanded varies with price; the law of demand gives a downward‑sloping curve.
Individual supply shows how one producer’s quantity supplied varies with price; the law of supply gives an upward‑sloping curve.
Market demand and market supply are the horizontal sums of all individual demand and supply curves respectively.
Equilibrium is the point where market demand equals market supply; any shift in either curve changes the equilibrium price and quantity.
Elasticities measure the responsiveness of quantity demanded to changes in price, income, or the price of related goods and are essential for analysing real‑world situations.
9. Quick‑Check Questions
Explain why a fall in the price of a complementary good shifts the market demand curve for the original good to the right.
Given the following individual demands at a price of $5, calculate the market quantity demanded:
Consumer D: 3 units
Consumer E: 2 units
Consumer F: 4 units
Answer: 3 + 2 + 4 = 9 units.
A new technology reduces the cost of producing Good Y, leading to a lower market price. Distinguish between the resulting movement along the demand curve and a shift of the demand curve, and explain why it is a movement.
Calculate the price elasticity of demand for a product whose price falls from $8 to $6 and quantity demanded rises from 40 to 55 units.
Identify two determinants that would make the demand for a good more price‑elastic and explain why.
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