Demand and Supply – by Jeff Traczynski, 8/28/07 Demand Our discussion of demand begins with the definition of the Law of Demand: Law of Demand: the quantity demanded of a good or service is an inverse function of its price, holding everything else constant. So, what does this mean? There are two important things to take away from this definition. First, this means that when the price of a good goes up, people want to buy less of it. This part is pretty intuitive, and gives demand curves their general shape as shown below.

Here, we see that when the price of the good (P, on the vertical axis) is high, the quantity demanded of the good (Q, on the horizontal axis) is low, and vice versa. You’ll also notice that while we’ve been calling this a demand “curve”, the picture is clearly a straight line. For simplicity, we’ll be using straight line demand curves at many times throughout the class. This assumption makes the math simpler (especially when we get to monopolies) without sacrificing too much generality. As you’ll see below, we’ll often make the same assumption about supply curves. The second important part of the Law of Demand is that last little phrase, “holding everything else constant”. Economists call “everything else” which needs to be held constant the Determinants of Demand. These determinants are a list of things which affect how much of the good in question consumers want to buy at a given price, which is exactly what the demand curve represents. Thus, changes in the determinants of demand change the demand curve.

Determinants of Demand 1) Price of the good itself 2) Price of other goods and services 3) Income / Wealth 4) Consumer Preferences / Tastes 5) Population 6) Expected Future Prices The first item of the above list, the price of the good itself, affects the demand curve differently than the other items. A change in the price of the good