Lecture 2 Demand

Outline DEMAND Markets What is demand? Law of demand the demand schedule and the demand curve; Changes in quantity demanded vs. Changes in demand Determinant factors

Introduction Demand and Supply Economic model Designed to explain how prices are determined in certain types of markets

Markets What is a market?

Markets Market The economy A group of buyers and sellers with the potential to trade with each other Can be defined broadly or narrowly Microeconomics vs. macroeconomics Geographically The economy A collection of individual markets Shoes, clothes, houses, education, haircuts, etc

Competition in Markets Distinguish between two kinds of competition Imperfectly competitive markets Buyers/sellers can influence the price A few large buyers or sellers Product differentiation Examples? Perfectly competitive markets (or just competitive markets) Buyers/sellers take the market price Many small buyers and sellers Standardized product

Using Supply and Demand Supply and demand model Designed to explain how prices are determined in perfectly competitive markets To analyze a market, we need both- Supply and Demand Focus on Demand for this class session

Demand – Quantity Demanded What is demand (or quantity demanded)?

Demand – Quantity Demanded amount of a good all buyers in a are willing and able to buy At given prices during a period of time

Demand – Quantity Demanded Is Hypothetical quantity the households are able to purchase given the price Depends on Price assume other things constant explore the relationship between price and quantity demanded

The Law of Demand When the price of a good rises and everything else remains the same, the quantity of the good demanded will fall Ceteris paribus assumption many variables change simultaneously understand each variable separately we assume “everything else remains the same” understand how demand reacts to price

Demand Schedule and Demand Curve We can illustrate the law of demand in two ways: Demand schedule Demand curve

Demand Schedule Demand schedule list of different quantities demanded at different prices, ceteris paribus Price of Coke (Ghc) Quantity Demanded (bottles per month) 1 75,000 2 60,000 3 50,000 4 40,000 5 35,000

The Demand Curve Demand curve Each point on the demand curve relationship between the price of a good and the quantity demanded, ceteris paribus Each point on the demand curve total quantity that buyers would choose to buy at a specific price Graphical depiction of a demand schedule Slopes downward Law of Demand

The Demand Curve The Demand Curve – movement along the demand curve Number of Bottles per Month Price per Bottle When the price is Ghc4.00 per bottle, 40,000 bottles are demanded A $4.00 At Ghc2.00 per bottle, 60,000 bottles are demanded B 2.00 D 40,000 60,000

Movements Along the Demand Curve A change in the price of a good causes a movement along the demand curve, ceteris paribus. a fall in price - move rightward along the demand curve (from A to B) a rise in price - move leftward along the demand curve (from B to A).

Some Terminology: Change in Quantity Demanded A particular amount buyers would choose to buy at a specific price One point on a demand curve Change in quantity demanded A movement along a demand curve in response to a change in price

Change in Demand “Demand” Change in demand Relationship between price and quantity demanded Represented by the entire demand curve Change in demand Shift of the demand curve From changes in something other than price

The Demand Curve A Shift of the Demand Curve Number of Bottles per Month Price per Bottle An increase in income shifts the demand curve for coke from D1 to D2 D2 D1 At each price, more bottles are demanded after the shift B C $2.00 60,000 80,000

Shifts of the Demand Curve A change in any variable that affects demand—except for the good’s price— causes the demand curve to shift. An increase in quantity at any price The demand curve shifts rightward (increase in demand) A decrease in quantity at any price The demand curve shifts leftward (decrease in demand)

Factors that Shift the Demand Curve What are some factors that may cause the demand curve to shift?

Factors that Shift the Demand Curve What are some factors that may cause the demand curve to shift? Income Wealth Prices of related goods Population changes Expected changes in price Tastes/ Preferences

Factors that Shift the Demand Curve Income How does income affect demand?

Factors that Shift the Demand Curve Income Normal Good People demand more as the income rises (examples?) Inferior Good People demand less as the income rises (examples?) A rise in income will increase the demand for a normal good decrease the demand for an inferior good

Factors that Shift the Demand Curve Wealth Difference between income and wealth? How does wealth influence demand?

Factors that Shift the Demand Curve Wealth Total value of everything you own minus the total dollar amount you owe An increase in wealth will increase demand (shift rightward) for a normal good decrease demand (shift leftward) for an inferior good

Factors that Shift the Demand Curve Prices of Related Goods Substitutes can be used in place of some other good fulfills more or less the same purpose Examples? Complements used together with the good we are interested in Effect of a change in price of substitute or complement on the demand for a good?

Factors that Shift the Demand Curve Prices of Related Goods A rise in the price of a substitute will: increase the demand for a good (shift the demand curve to the right) A rise in the price of a complement will decrease the demand for a good (shifts the demand curve to the left)

Factors that Shift the Demand Curve Population Effect of a change in population on demand?

Factors that Shift the Demand Curve Population An increase in population will increase the number of buyers increase the demand (rightward shift)

Factors that Shift the Demand Curve Expected Price How does an expected upwards or downwards change in price affect demand?

Factors that Shift the Demand Curve Expected Price An expected rise in price shifts the demand curve rightward (increase) An expected fall in price shifts the demand curve leftward (decrease)

Factors that Shift the Demand Curve Tastes/Preferences How do consumer preferences affect demand?

Factors that Shift the Demand Curve Tastes/Preferences tastes change toward a good demand increases (demand curve shifts right) tastes change away from a good demand decreases (demand curve shifts left)

Changes in Quantity Demanded The Demand Curve – A summary Price ↓ Move rightward along the demand curve Price ↑ Move leftward along the demand curve P P A B P1 P2 B A P2 P1 D D Q1 Q2 Q Q2 Q1 Q

Changes in Demand Figure 4 The Demand Curve – A summary The Demand curve shifts rightward P Income or wealth ↑ Price of substitute↑ Price of complement ↓ Population ↑ Expected price ↑ Tastes shift toward good D2 D1 Q

Changes in Demand Figure 4 The Demand Curve – A summary The Demand curve shifts leftward P Income or wealth ↓ Price of substitute ↓ Price of complement ↑ Population ↓ Expected price ↓ Tastes shift away from good D1 D2 Q

Take-home exercise Discuss and illustrate with a graph how each of the following events will affect the demand and quantity demanded for cocoa powder in Ghana An inflow of about 2million immigrants are expected in the country There is an increase in economic growth and general income levels of citizens The price of coffee has declined Consumers expect that in the future, cocoa powder prices will rise The price of cocoa powder rises

Next Class Supply Putting Demand and Supply together the supply schedule and the supply curve; The law of supply Individual vs. Market Supply factors influencing quantity supplied; changes in supply vs. changes in quantity supplied Putting Demand and Supply together