Economics Chapter 2.1

Demand: determinants of demand. The following factors determine the demand for a good: Price of the good Tastes Information Prices of related goods Complements and substitutes Income Government rules and regulations Other

Market Demand Market demand is the total quantity of a good or service that all potential buyers would choose to buy at any given price.

Demand and The Price of a Good Ceteris Paribus – a Latin phrase meaning “other things being equal” it is used in economics when we focus on changes in one variable while holding other influences constant.

The Law of Demand States that when the price of a good rises and everything else remains the same, the quantity of the good demanded will fall The words, “everything else remains the same” are important In the real world many variables change simultaneously However, in order to understand the economy we must first understand each variable separately Thus we assume that, “everything else remains the same,” in order to understand how demand reacts to price

Demand: the demand curve Quantity demanded - the amount of a good that consumers are willing to buy at a given price, holding constant the other factors that influence purchases. Demand curve - the quantity demanded at each possible price, holding constant the other factors that influence purchases © 2009 Pearson Addison-Wesley. All rights reserved.

From a Demand Table to a Demand Curve Price per cassette A B C D E A Demand Table DVD rentals demanded per week $0.50 1.00 2.00 3.00 4.00 9 8 6 4 2 A Demand Curve $6.00 5.00 E 4.00 Price per DVDs (in dollars) 3.50 G D 3.00 Demand for DVDs C 2.00 B F 1.00 A .50 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of DVDs demanded (per week)

Shift in Demand Price (per unit) Quantity demanded (per unit of time) 100 $2 $1 200 D0 Change in demand (a shift of the curve) D1 B A 250

© 2009 Pearson Addison-Wesley. All rights reserved. Figure 2.1 A Demand Curve Law of Demand consumers demand more of a good the lower its price, holding constant all other factors that influence consumption 14.30 , $ per kg p Demand curve for pork, D1 4.30 3.30 2.30 200 220 240 286 Q, Million kg of pork per year © 2009 Pearson Addison-Wesley. All rights reserved.

Non-price Determinants of Demand: Factors that shift the Demand Curve “TRIBE”

Changes in Consumer Tastes and preferences “T” is for taste Changes in Consumer Tastes and preferences

Changes in the Price of a Related good -Complements -Substitutes “R” is for related Changes in the Price of a Related good -Complements -Substitutes

Changes in Consumer Income “I” is for income Changes in Consumer Income

Changes in the Number of Consumers (Buyers) in the Market “B” is for buyers Changes in the Number of Consumers (Buyers) in the Market

“E” is for expectations Changes in Consumer Expectations

Snob Effect Some people may value certain goods more highly simply because they are priced high. Example would be a Rolex watch

The determinants of Demand Economics The determinants of Demand

Individual Demand: Effect of Income Changes Normal Good vs. Inferior Good Income Changes The good is a normal good one where the quantity demanded increases in response to an increase in consumer income. The good is an inferior good one where the quantity demanded decreases in response to an increase in consumer income. Chapter 4 4

Substitutes Substitutes are goods you might purchase instead of each other. If A and B are substitutes, a change in the demand of a A causes the opposite change in the demand for B.

Substitutes Example: Rye Bread and Wheat Bread If rye bread goes on sale, the demand for it will increase. The demand for wheat bread will decrease. If rye bread becomes expensive, the demand for it will decrease. The demand for wheat bread will increase.

Complements Complements are goods that are often purchased together. If A and B are complements, a change in the demand of a A causes the same change in the demand for B.

Complements Example: Hamburger and Hamburger Rolls If hamburger meat goes on sale, the demand for hamburger will increase. This will cause the demand for hamburger rolls to increase also. If the price of hamburger meat skyrockets, the demand for hamburger will decrease. This will cause the demand for hamburger rolls to decrease also.

Substitute or Complements? Coffee and Tea are substitutes. Needle and Thread are complements. Marker and Crayon are substitutes.

Tastes and Preferences of the Consumers An important factor which determines the demand for a good is the tastes and preferences of the consumers for it. A good for which consumers’ tastes and preferences are greater, its demand would be large and its demand curve will therefore lie at a higher level. People’s tastes and preferences for various goods often change and as a result there is change in demand for them. The changes in demand for various goods occur due to the changes in fashion and also due to the pressure of advertisements by the manufacturers and sellers of different products. On the contrary, when certain goods go out of fashion or people’s tastes and preferences no longer remain favorable to them, the demand for them decreases.