a Define carefully what is meant by a demand schedule or cur

a. Define carefully what is meant by a demand schedule or curve. State the law of downward-sloping demand. Illustrate the law of downward-sloping demand with two cases from you own experience.

b. Define the concept of a supply schedule or curve. Show that an increase in supply means a righward and downward shift of the supply curve. Contrast this with the righward and upward shift of the demand curve implied by an increase in demand.

Solution

a. There exists a definite relationship between the market price of a good and the quantity demanded of that good, other things held constant. This relationship between price and quantity bought is called the demand schedule or demand graph.

Law of downward-sloping demand: When the price of a commodity is raised (and other things are held constant), buyers tend to buy less of the commodity. Similarly, when the price is lowered other things being constant, quantity demanded increases.

Quantity demanded tends to fall as price rises for two reasons:

1. First is the substitution effect, which occurs because a good becomes relatively more expensive when its price rises. When the price of good A rises, I will generally substitute goods B, C, D, . . . for it. For example, as the price of beef rises, I eat more chicken.

2. A higher price generally also reduces quantity demanded through the income effect. This comes into play because when a price goes up, I fi nd myself somewhat poorer than I was before. If gasoline prices double, I have in effect less real income, so I will naturally curb my consumption of gasoline and other goods.

b. The supply schedule (or supply curve) for a commodity shows the relationship between its market price and the amount of that commodity that producers are willing to produce and sell, other things held constant.