ECS 1501 Learning Unit 4

Learning Outcomes Once you have studied this chapter you should be able to explain what economics is all about: Understand the interaction between households and firms Explain demand and supply with words and with a graph Define the law of demand Explain the difference between demand and quantity demanded Explain the difference between supply and quantity supplied Show the shift of the demand or supply curves and a movement of along the curves. Identify determinant of demand and supply.

4.1 Demand and supply: . An introduction Read pg. 60 in your textbook 4.1 Demand and supply: . An introduction We focus on the goods market, the market where firms are suppliers, and households are consumers who demand goods and services In the market economy prices and quantities traded in the goods markets are determined by the interaction of demand and supply

The interaction between households and firms Rent, wages, salaries, interest and profit paid to households Natural resources, labour, capital and entrepreneurship sold to firms Firms Households Supply goods and services Demand for goods and services Goods market

Read pg. 61 – 68 in your textbook 4.2 Demand Demand is the outcome of decisions about which wants to satisfy, given the available means Sally’s demand for coffee means she intends to buy the coffee and has the means to do so. Demand refers to the quantity of coffee that Sally is willing and able to buy Demands are NOT wants. Wants are unlimited desires that people have Demand is only effective when a consumer is willing and able to buy Demands are NOT needs or claims either

The demand function 𝑄 𝑑 =𝑓( 𝑃 𝑥 , 𝑃 𝑔 , 𝑌, 𝑇, 𝑁, …) Where: 𝑄 𝑑 =𝑓( 𝑃 𝑥 , 𝑃 𝑔 , 𝑌, 𝑇, 𝑁, …) Where: 𝑄 𝑑 = Quantity of Coffee demanded 𝑃 𝑥 = Price of Coffee 𝑃 𝑔 = Prices of related goods Y = Household’s (or Sally’s) income during the period T = Tastes or preferences of the consumer (Sally) N = The number of people in the household … = Other possible influences on Sally’s demand 𝑄 𝑑 is the dependent variable and is expressed as a function of five independent variables ( 𝑃 𝑥 , 𝑃 𝑔 , 𝑌, 𝑇, 𝑁, …)

Prices of related products Individual Demand What will determine the quantities of coffee Sally plans to buy? Price of Coffee The lower the price of coffee, the larger the quantities of coffee that Sally would want to buy. Prices of related products Complements – goods that are used jointly. Sugar and milk are complements as they are used in the process of preparing a cup of coffee Substitutes – Goods that can be used instead. Tea is a substitute as Sally can drink tea if she cannot afford coffee Income Sally’s decision will be influenced by her income. The higher her income, the more coffee she will be able to afford Size of the household If Sally lives alone she will buy less coffee than if she was living with someone who also enjoys consuming coffee Tastes or preferences The more Sally enjoys coffee, the more she will consume and hence buy. However, Sally may not like coffee and only purchase it for her visitors. She will then consume less coffee.

For introductory purposes we make the ceteris paribus assumption meaning that all other variables are assumed to be constant except the price of the product. Hence the quantity demanded becomes a function of the price 𝑄 𝑑 =𝑓( 𝑃 𝑥 ) Therefore, the Law of Demand states: All other things being equal (ceteris paribus),the higher the price of a good, the lower the quantity demanded will be.

The Law of Demand The law of demand states that there is a negative/ inverse relationship between the price of a product and the quantity demanded A negative relationship can be identified by one variable increasing while another variable decreases, a positive relationship can be identified by both variables increasing or both variable decreasing at the same time.

Sally’s demand for coffee tins Sally’s demand for coffee tins is a clear reflection of the law of demand. As the price of coffee increases, Sally’s quantity demanded for coffee decreases. Sally’s demand can be presented graphically by putting the Price of coffee on the y-axis and the quantity demanded on the x-axis. This will create a demand curve Price of coffee Quantities of coffee demanded R10 100 R20 80 R30 60 R40 40 R50 20 R60