Demand, Supply and Price Equilibrium in Market Structures Part I Economics Mr. Bordelon

What exactly is demand? Demand. The desire to own something and the ability to pay for it. Notice that there are two elements to this: Willing to buy the product Able to buy the product. You must be both willing and able to buy the product in order to have demand. If one is missing, then no demand.

Law of Demand As price increases, quantity demanded decreases. As price decreases, quantity demanded increases.

Individual Demand Schedule Market Demand Schedule Price of a slice of pizza (P) Quantity demanded per day (Qd) $0.50 5 300 1.00 4 250 1.50 3 200 2.00 2 150 2.50 1 100 3.00 50 Demand schedules need to reflect the law of demand. How do these two demand schedules do so?

Price per slice (in dollars) The Demand Curve Market Demand Curve 3.00 2.50 2.00 1.50 1.00 .50 50 100 150 200 250 300 350 Slices of pizza per day Price per slice (in dollars) A demand curve is a graphical representation of a demand schedule. When reading a demand curve, assume all outside factors, such as income, are held constant. Demand

Substitution Effect Substitution effect. When consumers react to an increase in a good’s price by consuming less of that good and more of other goods. Okay...translate, what does this mean?

Substitution Effect Substitution effect. When consumers react to an increase in a good’s price by consuming less of that good and more of other goods. In other words, if the price of the good you want gets too high in price, if there’s another good out there that’ll work, and is cheaper, you will get that other good. That other good is a substitute.

Income Effect Income effect. The change in consumption resulting from a change in real income. When the price of the product changes, then you will purchase that product based on the amount you earn.

Income Effect Income effect. The change in consumption resulting from a change in real income. Awesome...what does this mean?

Shifts in Demand Ceteris paribus. All other things held constant. Demand curves are only accurate so long as this assumption is held in place. When we drop this assumption, then we’re no longer moving along the demand curve like before. Now the entire demand curve shifts. Why do economists care about this?

Modeling a Shift in Demand

Causes of Demand Shift Income. When a change in income happens, then there will be a shift in demand. A decrease in income, demand shifts left. An increase in income, demand shifts right. Normal good. Good that consumers demand more of when incomes increase. Inferior good. Good that consumers demand less of when income increases. Does this have anything to do with quality?

Causes of Demand Shift Consumer expectations. If a buyer expects a change in price in the future, then the overall demand for that good today will change. If I know the price is going up next week, I’m going to buy now. Demand shifts right. If I know the price is decreasing next week, I’m going to hold off and buy then. Demand shifts left.

Causes of Demand Shift Population. Change in the size of the population will affect demand. If people coming home from war have lots of babies, population increases. Demand shifts right. If a nuclear war happens and wipes out half the people, population decreases. Demand shifts left.

Causes of Demand Shift Consumer Tastes and Advertising. Justin Bieber can’t stay popular forever. If buyers no longer like a good, they stop buying. Demand shifts left. If buyers suddenly decide they love something, they start buying. Demand shifts right.

Prices of Related Goods Complements. Two goods that are bought and used together. Price of hot dogs increases to $5 a pack. What happens to the demand for hot dog buns?

Prices of Related Goods Complements. Two goods that are bought and used together. Price of hot dogs increases to $5 a pack. What happens to the demand for hot dog buns? Demand will decrease, demand curve shifts left.

Prices of Related Goods Substitutes. Goods used in place of one another. Oreos are now $10 a bag. What am I going to do?

Prices of Related Goods Substitutes. Goods used in place of one another. Oreos are now $10 a bag. What am I going to do? Clearly, buy another cookie for less.