Prepared by Dr.Hassan Sweillam DEMAND THEORY Prepared by Dr.Hassan Sweillam Demand

MODEL OF DEMAND The model of demand is an attempt to explain the amount demanded of any good or service. DEMAND DEFINED The amount of a good or service a consumer wants to buy, and is able to buy per unit time. Demand

THE “STANDARD” MODEL OF DEMAND The DEPENDENT variable is the amount demanded. The INDEPENDENT variables are: the good’s own price the consumer’s money income the prices of other goods preferences (tastes) Demand

YOU COULD WRITE THE MODEL THIS WAY: The demand for tacos QD(tacos) = D(Ptacos, Income, Pspaghetti, Pcola, tastes) ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENT VARIABLE AFFECT THE AMOUNT DEMANDED Demand

THE DEMAND CURVE The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand. The DEPENDENT variable is the quantity demanded. The INDEPENDENT variable is the good’s own price. Demand

THE LAW OF DEMAND The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand. The Law of Demand says that demand curves are negatively sloped. Demand

A DEMAND CURVE A demand curve must look like this, i.e., be negatively sloped. own price demand quantity demanded Market for tacos Demand

The demand curve means: You pick a price, such a p0, and the demand curve shows how much is demanded. own price p0 Q0 demand quantity demanded Market for tacos Demand

AN IMPORTANT POINT When drawing a demand curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis. Demand

Other factors affecting demand The question here is how to show the effects of changes in income, other goods’ prices, and tastes on demand. Demand

Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the good’s own price. own price How does this affect the demand curve? $1/can demand @ I = $1000 quantity of Cola Market for Cola Demand Go to hidden slide

Normal goods Normal good: is a type of good for which demand increases as the level of income  in the economy increases. When an increase in income causes an increase in demand. In general, Nike or Adidas shoes would be a normal good. As you make more money, you are likely to move from off-brand shoes to nicer quality ones. To summarize, a good is normal when you consume or demand more of it because your income has increased.

Inferior goods Inferior good: An inferior good is a type of good for which demand declines as the level of income  in the economy increases. When an increase in income causes a decrease in demand. examples of inferior goods. Coffee is a good example. A McDonald’s coffee can be an inferior good compared to Starbucks coffee. When a consumer's income drops, he may substitute his daily Starbucks coffee for a more affordable McDonald’s coffee. On the other hand, when a consumer's income rises he may substitute his McDonald's coffee for the more expensive Starbucks coffee.

Pizza is a normal good. Market for pizza own price demand @ I = $1000 What’s the effect on the demand curve for pizza if income rises to $2,000? own price demand @ I = $1000 quantity Market for pizza Demand Go to hidden slide

Suppose instead that pizza was an inferior good. own price What’s the effect on the demand curve for pizza if income rises to $2,000? demand @ I = $1000 quantity Market for pizza Demand Go to hidden slide

Substitutes goods Substitutes: A substitute good is one good that be can be used instead of another ,These products are substitutes because they satisfy similar consumer needs and possess significant cross-price elasticity. Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other. Thus, an increase in the price of pizza would increase the demand for Lazania if the goods were substitutes. Examples : Coke and Pepsi, McDonald's and Burger King hamburgers, Crest and Colgate toothpastes, tea and coffee Demand

The graph shows the demand curve for spaghetti when pizzas cost $10 each. own price What’s the effect of an increase in the price of pizza to $15? demand @ pizza price of $10 quantity Market for spaghetti Demand Go to hidden slide

Complements goods Complementary Goods: Goods that cannot be used without one another, Two goods (A and B) are complementary if using more of good A requires the use of more of good B. For example, the demand for one good (printers) generates demand for the other (ink cartridges). Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. Examples: Tea and sugar, Printers and ink cartridges, Computer hardware and computer software, Car and fuel Demand

The graph shows the demand curve for sugar when tea cost $10 each. price of sugar What is the effect on the market for sugar of an increase in the price of tea to $15? demand @ tea price of $10 quantity Market for sugar Demand Go to hidden slide

The graph shows the demand curve for umbrellas on sunny days. What’s the effect on demand of it being a rainy day? price of umbrellas demand on sunny days quantity Market for umbrellas Demand Go to hidden slide

DEMAND SUMMARY Demand is a function of own-price, income, prices of other goods, and tastes. The demand curve shows demand as a function of a good's own price, all else constant. Changes in own-price show up as movements along a demand curve. Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve. Demand

Review questions True or False Questions 1- Demand is the amount of a good or service a consumer wants to buy, and is unable to buy per unit time. Answer: False 2- The dependent variable in demand model is the amount demanded. Answer: True

Review questions True or False Questions 3- The dependent variables in the demand model are, the good’s own price, the consumer’s money income, the prices of other goods, preferences (tastes). Answer: False 4- The Law of Demand says that demand curves are positively sloped.

Review questions Multiple Choice Questions 1- ____________is a type of good for which demand increases as the level of income  in the economy increases. A- Demanded Good B- Inferior good C- Normal good D- Main Answer: C

Review questions 2- ____________  is one good that be can be used instead of another. A- Substitute good B- Inferior good C- Complementary good D- None of these Answer: A

Review questions 3- Two goods are _____________ if an increase in the price of one of them causes a decrease in the demand for the other. A- Substitute good B- Normal good C- Complementary good D- None of these Answer: C

Review questions Brief explain Questions 1- Briefly explain the Law of Demand illustrated with graphics? 2- Briefly explain the Normal and Inferior goods? 3- Briefly explain the Substitute and Complementary good s? Brief explain Questions