To Apply your Knowledge by proving the Law of To Self-Assess your understanding of Demand, Demand lines and the Law of Demand (definitions, the construction of graphs and how to explain them using notation). To Apply your Knowledge by proving the Law of Demand with the aid of a Graph. To be Able to Define, Explain & give Examples of Exceptions to the Law of Demand. To Know How to Construct & Explain a Perverse or Regressive Demand Line. To be Able to Define, Illustrate & Explain Producer Supply. D.Skelly TY Economics November 2013

How to draw and label a Graph for a Normal Good To explain with the aid of a Graph and using Notation, the Law of Demand How to draw and label a Graph for a Normal Good The Law of Demand KWHL D.Skelly TY Economics November 2013

A Demand line is a graph illustrating the demand for a good at various prices at any given time. The Law of Demand states that when price increases the quantity demanded decreases and vice versa. The Demand line of a Normal Good is Downward-Sloping from Left to Right. D.Skelly TY Economics November 2013

At higher prices, consumers generally buy less than at lower prices. A negative slope A Bivariate Axis A Normal Good obeys the Law of Demand At higher prices, consumers generally buy less than at lower prices. D.Skelly TY Economics November 2013

Demand for Good X Notation: Explanation: P=Price P1=Price in period 1 Q=Quantity demanded Q1=Quantity demanded in period 1 Q2=Quantity demanded in Period 2 Explanation: At P1, Qd=Q1 When P↑ from P1 to P2, Qd↓ from Q1 to Q2 D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

Exceptions to the Law of Demand 1. Giffen Goods 2. Snob / Status Goods or Items of Conspicuous expenditure. 3. Speculative Goods 4. Additive Goods 1. To draw a graph of a Perverse or Regressive demand line. 2. To explain using Notation why it does not comply with the Law of Demand. D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

1. Giffen Goods For some necessities an ↑in P causes an ↑ in Qd. Goods of lower quality make up a large part of expenditure of low-income families. Even if the price of own brand bread (a Giffen good) rises, those on low incomes may continue to buy the good even after the price increase. The shortfall in income as a result of the price increase of the necessity (Giffen good) is made up by cutting back on something else (e.g. a luxury). D.Skelly TY Economics November 2013

Giffen Goods are goods with a positive price effect (relationship between P & Qd) , i.e. when P↑, Qd ↑ and when P↓, Qd ↓ D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

A Supply Line is a graph illustrating the number of units of a good made available for sale by the producer / seller at various market prices at any given time. There is a Positive Relationship between P and Qs, i.e. as P↑, Qs↑ and vice versa (the Law of Supply). The Supply Line is usually upward sloping from left to right (Remember?: Land is fixed in supply) D.Skelly TY Economics November 2013

Supply of Good X D.Skelly TY Economics November 2013 50-1.15

Explanation D.Skelly TY Economics November 2013

On Hand-Out D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

We assessed our knowledge of Demand and Demand Lines from the Consumers perspective. The Law of Demand States that when P↑, Qd↓, and Vice Versa. We demonstrated and explained this with the aid of a Graph. There are 4 Exceptions to the Law of Demand: Giffen Goods, Snob Goods, Speculative goods, and goods of an addictive nature. We illustrated and explained that these have a Perverse or Regressive Demand Line. This means that they do not comply with the Law of Demand. D.Skelly TY Economics November 2013

We examined Supply from the Producers perspective. We learned why there is a Positive Relationship between P & Qs. We know that this means that when P↑, Qs↑ and when P↓Qs↓ . We learned how to illustrate and explain, with the aid of a Graph (a Supply Line), the Positive Relationship between P and Qs. D.Skelly TY Economics November 2013

Answer Question 3 on Hand-Out. Read in advance and underline the main points about Equilibrium in the notes I gave you on Demand and Supply. The “Free Market” in 60 Seconds. D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

Market Equilibrium In a “Free Market”, price will eventually settle at the level where Qd=Qs. This position where there is no tendency for prices to change is called the MARKET EQUILBRIUM. At Equilibrium, the allocation of goods is most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. D.Skelly TY Economics November 2013

The “Free Market” in 60 Seconds. The Invisible Hand? D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

Excess Demand & Excess Supply If Qs > Qd, producers will ↓ price to get rid of surplus stock. EXCESS SUPPLY: If Qd > Qs, producers will ↑ P to remove scarcity. D.Skelly TY Economics November 2013

Graph: Excess Demand & Excess Supply. D.Skelly TY Economics November 2013

Consumer Surplus Producer Surplus D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

D.Skelly TY Economics November 2013

Captions D.Skelly TY Economics November 2013