Module Supply and Demand: Introduction and Demand 5

What you will learn in this Module : What a competitive market is and how it is described by the supply and demand model What the demand curve is The difference between movements along the demand curve and changes in demand The factors that shift the demand curve

i Competitive Market Supply and Demand Model Supply and Demand: A Model of a Competitive Market

Demand schedule Quantity demanded Demand curve Law of Demand The Demand Curve

Demand Schedule and Demand Curve PriceQuantity $ 8 3 $ 7 5 $ 6 7 $ 5 10 $ 4 12 $ 3 16 $ 2 22 Price Quantity

Understanding Shifts of the Demand Curve Increase = right, Decrease = left M.E.R.I.T. shifts demand market size (number of consumers) expectations related prices (complements, substitutes) income (normal, inferior) tastes

Shift in Demand When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.

Shift in Demand Curve (a change in demand due to everything but price) D1 D2 P Q 8 Q1Q2

What Causes a Shift in Demand? Several factors can lead to a change in demand: 1. Income Changes in consumers incomes affect demand. A normal good is a good that consumers demand more of when their incomes increase. An inferior good is a good that consumers demand less of when their income increases. 2. Consumer Expectations Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good today. 3. Population Changes in the size of the population also affects the demand for most products. 4. Consumer Tastes and Advertising Advertising plays an important role in many trends and therefore influences demand.