Define and analyze Demand Lecture 4 Demand Define and analyze Demand

Markets Coordinate Resource Allocation by The Interaction of Demand and Supply in determining prices

The Foundation of Demand If a person demands something, they Want it, Can afford it, and Have made a definite plan to buy it. It takes more than just wanting it. 9

What determines buying plans? The price of the good The prices of related goods Income Population Preferences Expected future prices 11

CETERIS PARIBUS VERY IMPORTANT The concept of the quantity demanded of a good or service is related to the price of that good or service, CETERIS PARIBUS 10

What Ceteris are Paribus? The quantity demanded is the amount that consumers plan to buy during a given time period at a particular price. What Ceteris are Paribus? 10

The prices of related goods Income Population Everything Else The prices of related goods Income Population Preferences Expected future prices 11

The Law of Demand Ceteris Paribus, the higher the price of a good, the smaller is the quantity demanded; And Vice Versa 12

Substitution Effect (opportunity cost) WHY? The Reasons for the Law Substitution Effect (opportunity cost) Income Effect (like a decrease in income) 12

Demand The Reasons for the Law Substitution Effect (opportunity cost increases) Suppose the price of a candy bar is $2, and the price of a movie increases from $4 to $8: The opportunity cost of a movie increases from 2 to 4 candy bars! 12

Income Effect (buy less of something) The Reasons for the Law Income Effect (buy less of something) the price of a movie increases you can attend the same number of movies and buy less candy.. cut back on the number of movies and buy the same number of candy bars. There are a lot of options... 12

Demand Schedule and Demand Curve Demand schedules list the quantities demanded at each different price Demand curves are graphs of demand schedules showing the relationship between the quantity demanded of a good and its price 13

Demand Schedule Price Quantity a 1 9 b 2 6 c 3 4 d 4 3 e 5 2 (dollars per CD) (millions of CDs per week) a 1 9 b 2 6 c 3 4 d 4 3 e 5 2 Instructor Notes: 1) The table shows a demand schedule listing the quantity of tapes demanded at each price if all other influences on buyers’ plans remain the same. 2) At a price of $1 a tape, 9 million tapes a week are demanded; at a price of $3 a tape, 4 million tapes a week are demanded. 14

Demand Curve Demand Curve for CDs e d c b a 6 Price (dollar per CD) 5 4 c 3 b Instructor Notes: 1) The demand curve shows the relationship between quantity demanded and price, everything else remaining the same. 2) The demand curve slopes downward: As price decreases, the quantity demanded increases. 3) The demand curve can be read in two ways. For a given price, it tells us the quantity that people plan to buy. For example, at a price of $3 a tape, the quantity demanded is 4 million tapes a week. 4) For a given quantity, the demand curve tells us the maximum price that consumers are willing and able to pay for the last tape available. For example, the maximum price that consumers will pay for the 6 millionth tape is $2. 2 a 1 0 2 4 6 8 10 Quantity (millions of CDs per week) 17

A Price Increase Price P1 P0 D0 Q1 Q0 Quantity 31

Demand A Change in Demand (vs. change in quantity demanded) When any factor that influences buying plans changes, other than the price of the good, there is a change in demand. Demand 18

An increase in demand causes the demand curve to SHIFT RIGHTWARD 18

Price Increase in demand D1 D0 Quantity 35

A decrease in demand causes the demand curve to SHIFT LEFTWARD 18

A Change in Demand Price Decrease in Demand D0 D2 Quantity 35

What Causes Increases and Decreases in Demand? Not a change in a good’s price! WHY? Because that causes a change in Quantity Demanded movement along a given demand curve 11

Demand It’s the Other Things The prices of related goods Income Population Preferences Expected future prices Demand 11

Goods used in the place of another good Price of Related Goods Substitutes Goods used in the place of another good Complements Goods used in conjunction with another good 19

A Change in Demand What Happens to Demand if the price of a complement good decreases? 19

What happens if the price of a CD player falls to $50? Demand for CDs (CD Player $200) 6 5 What happens if the price of a CD player falls to $50? Price (dollar per CD) 4 3 2 1 0 2 4 6 8 10 12 14 Quantity (millions of CDs per week) 25

(CD Player $50) 6 Price (dollar per CD) 5 4 Demand for CDs 3 2 1 Instructor Notes: When demand increases, the demand curve shifts rightward, as shown by the shift arrow and the resulting red curve. 1 Demand for CDs (CD Player $50) 0 2 4 6 8 10 12 14 Quantity (millions of CDs per week) 26

A Change in Demand What Happens to Demand if the price of a substitute good increases? 19

Demand for apples (oranges $2/kg.) 6 Price (dollar per kg) 5 4 3 2 1 0 2 4 6 8 10 12 14 Quantity (millions of kilos per week) 25

Demand Demand for apples (oranges $4/kg.) 6 Price (dollar per kg) 5 4 3 2 Instructor Notes: When demand increases, the demand curve shifts rightward, as shown by the shift arrow and the resulting red curve. 1 0 2 4 6 8 10 12 14 Quantity (millions of kilos per week) 26

Demand increases as income increases Normal Goods Demand increases as income increases 20

A Change in Demand Income Inferior Goods Demand decreases as income increases EXAMPLES? A Change in Demand 20

Inferior Good NormalGood Price Inferior Good NormalGood D1 D0 D2 Quantity 35

A Change in Demand Population Size and age structure Preferences Attitudes toward goods and services Expected Future Prices Computers? A Change in Demand 21