Unit 1: Microeconomics

Demand Demand: is the relationship between the various possible prices of a good and the quantities of the good that consumers are willing to buy Quantity demanded is the amount of the good that consumers are willing to purchase at each price Note: the price is the independent variable and the quantity demanded is the dependent variable Demand can be shown using a demand schedule or demand curve Demand Schedule: is a list of the quantities of a good or service demanded at different prices, holding everything else constant (all other factors that influence consumers planned purchases)

Demand Curve Demand Curve: a graph showing the relationship between the quantities demanded of a good or service and its price. Example; The individual demand curve for Strawberries Note: A change in the quantity demanded means that there is a movement along the demand curve (for instance, from A to B) Price ($ per kg) Quantity Demanded (kg per month) Point on Graph 2.50 1 A 2.00 2 B 1.50 3 C

Quantity Demanded (Gabbie) Market Demand Market Demand: is the sum of all consumers quantities demanded at each price Example; The market demand curve for Strawberries Price ($ per kg) Quantity Demanded (Mr. Kenny) Quantity Demanded (Gabbie) Market Demand 2.50 1 2 3 2.00 5 1.50 4 7

Law of Demand Law of Demand: as the price of a good increases, the quantity demanded will decrease, ceteris paribus. A inverse relationship exists between the price of a good and the quantity demanded. This means the demand curve slopes downward

There are two main reasons why the demand curves slope down There are two main reasons why the demand curves slope down. They are known as the substitution effect and the income effect. Substitution Effect: the tendency of people to substitute in favour of cheaper commodities and away from expensive commodities. If the price of one good rises, whilst other prices and income remain constant, consumers will be inclined to switch away from the more expensive good to the now relatively cheaper substitutes. Example; What will you do if there is an increase in the price of Xbox? You may switch to PlayStation or stop playing the game Therefore, an increase in the price of Xbox will decrease the consumers willingness of buying an Xbox (ex; reduces the quantity demanded of Xbox)

Income Effect: is the change in demand or consumption resulting from a change in real income. If income remains constant and the price of a good rises then a consumer’s real income falls. If prices rise, real income falls and quantity demanded falls. If prices fall, real income increase and quantity demanded increases. Example; The price of coffee increases You decide that it is now too expensive and reduce your coffee consumption In general it is difficult to distinguish and separate income and substitution effects

Change in Demand A change in quantity demanded is caused by a change in price This means that there is movement along the demand curve, but the demand curve doesn’t shift Change in Demand: a change (increase or a decrease) in demand means that there is a change (an increase or a decrease) in quantity demanded of a good at any given price level Occurs if any other determinant (other than the price of good ) changes. A change in demand causes the demand curve to shift

Increase/Decrease in Demand Increase in demand shifts the demand curve upwards and to the right. Decrease in demand shifts the demand curve downwards and to the left

Determinants of Changes in Demand There are five main factors that can cause a change in the demand for a good 1) Number of Buyers 2) Income Goods are called “Normal goods” if an increase in income causes an increase in demand. Example; Demand for wine Goods are called “Inferior goods” if an increase in income causes a decrease in demand Example; Demand for SPAM or Kraft Dinner

3) Price of Related Goods Two goods are substitutes if a fall in the price of one good makes consumers less willing to buy the other Example; Beef and Chicken Two goods are complements if a fall in the price of one good makes consumers more willing to buy the other Example; Gasoline and Cars 4) Consumer Tastes and Preferences People’s preferences affect buying patterns 5) Consumer Expectations The expectations that consumers have about future changes in prices and their own incomes affect their current prices.

Changes in the Number of Buyers An increase in the number of buyers will cause a increase in demand. This means that the demand curve will shift to the right A decrease in the number of buyers will cause a decrease in demand. This means that the demand curve will shift to the left Price ($ per kg) Quantity Demanded (millions of kg) D2 D0 D1 2.50 5 7 9 2.00 11 1.50 13

Demand Relationships Variable Change in Variable Change in Demand Price Increase Decrease Inverse Number of Buyers Positive Income (Normal Good)) Income (Inferior Good) Negative Price of Substitutes Price of Complement Tastes/Preferences Advertising

Extension (HL) There are a couple of exceptions to the law of demand Giffen Goods: is a good in which people consume more of as the price rises, violating the law of demand Veblen Goods: are a group of commodities for which people's preference for buying them increases as a direct function of their price, as greater price confers greater status, instead of decreasing according to the law of demand. Example; Designer hand-bags, luxury cars