1 ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics

2 THREE WAYS TO REPRESENT DEMAND 1. A SCHEDULE 2. A GRAPH 3. AN EQUATION OR FUNCTION

3 Demand Schedule Let’s consider the demand schedule for beer at OSU. Please note that these do not represent actual combinations of prices and quantities bought, but only consumer assessments of what they would do when confronted with different prices per beer.

4 Demand Curve Now, the information in the table of the beer demand schedule translates directly into a demand curve. Demand Curve

5 Demand Equation Q = f (P) Q is the “dependent variable” P is the “independent variable” Supply and Demand Curves are plotted “backwards”.

6 Change in Quantity Demanded If we have a change in the price of the beer, whose demand we are examining, we will just get a movement along the single fixed demand. We call this change a change in quantity demanded.

7 Shift in Demand Curve Demand is usually considered a function of its own price, ceteris paribus. (Latin for “other things equal” or “other things constant”.) If one of the other variables changes, the way we would represent this on a 2-dimensional graph would be by “shift” of the entire demand curve. Any particular quantity figure that we read off this curve would be called a quantity demanded of beer. Actually, The entire curve is referred to simply as demand.

8 Shift in Demand Curve (1) Look at the demand curve for beer when there is a rise in price of wine. We would expect to see the entire demand curve for beer shift to the right. This means that at any price, people would now be demanding more beer:

9 Shift in Demand Curve (2) If a depression like we had in 1930’s should suddenly set in, so that there was a 25% drop in the average income in the country, then we would expect the demand for beer and a lot of other things to move to the left as long as they are normal commodities. Now, with people poorer, at every price the demand for commodities should be lower.

10 Distinction between: Change in Quantity Demanded & Change in Quantity Change in quantity demanded is a movement along a single demand curve - results from a change in price. Change in demand is a shift of the entire demand curve - results from a change in a ceteris paribus factor.

11 Change in Demand Ceteris Paribus Factors 1. Average Household Income 2. Prices of Related Products (a) Substitutes (b) Complements 3. Tastes + Preferences 4. Distribution of Income 5. Population 6. Expectation about the Future

12 Shift in Demand Curve (1) e.g. If a depression like we had in 1930’s should suddenly set in, so that there was a 25% drop in the average income in the country, then we would expect the demand for beer and a lot of other things to move to the left as long as they are normal commodities. Now, with people poorer, at every price the demand for commodities should be lower. Factor 1: Change in Average Household Income

13 Change in Average Household Income (ct’d) Two Possibilities Possibility 1: Normal Commodities When income goes up, demand increases and vice versa. Possibility 2: Inferior Commodities When income goes up, demand decreases and vice versa. e.g. Hamburger Helper

14 Shift in Demand Curve (2) This means that at any price, people would now be demanding more beer: Factor 2: Change in the Price of Related Commodities A.Substitutes: Consumed instead of one another Example: Wine and Beer Price of wine increases => Demand for beer increases

15 Change in the Price of Related Commodities (ct’d) B. Complements: Consumed together Example: Coffee and sugar Price of sugar increases => Demand for coffee decreases

16 Change in Demand Ceteris Paribus Factors 1. Average Household Income 2. Prices of Related Products (a) Substitutes (b) Complements 3. Tastes + Preferences 4. Distribution of Income 5. Population 6. Expectation about the Future

17