Lecture Notes: Market, Demand, and the Law of Demand

Definition of Market

Demand: The quantity of a good or service that consumers are willing and able to purchase at a given price in a specific time period.
Important to distinguish between wanting a product and being able to buy it.
- Example: A person may want a Porsche but cannot be part of the demand if they cannot afford it.
Effective Demand: Demand where consumers are both willing and able to buy the product at a specific price.

Law of Demand:
- As the price of a product falls, the quantity demanded usually increases (and vice versa).
- Expression: "Ceteris Paribus" (other things held constant).
Key Effects Explaining Law of Demand:
1. Income Effect:
  - If price rises (and income is constant), consumers buy less due to reduced purchasing power.
  - If price falls, consumers can afford to buy more.
2. Substitution Effect:
  - If the price of a product (e.g., Coca-Cola) rises, consumers may switch to a substitute (e.g., Pepsi).
  - Conversely, if the price falls, consumers will prefer the cheaper product.

Demand curves illustrate the inverse relationship between price and quantity demanded:
- When price rises, quantity demanded falls.
- When price falls, quantity demanded increases.
Changes in price lead to movements along the demand curve:
- Movement along the curve: Indicates changes in quantity demanded due to price changes.

Individual Demand: The demand for a product by a single consumer.
Market Demand: The total quantity demanded by all consumers in the market.
- To calculate market demand, sum the individual demands of all consumers for a given price.
- This process can be repeated for other prices to plot the entire market demand curve.