ECON107 Principles of Microeconomics Week 4 SEPTEMBER w/9/2013 Dr. Mazharul Islam Chapter-3

3 Demand 3w/9/2013 Dr. Mazharul Islam

Lesson Objectives  Define demand and quantity demanded  Describe a competitive market and think about a price as an opportunity cost  Explain law of demand and influences of demand  Explain how to draw demand curve and make demand schedule 3 4w/9/2013 Dr. Mazharul Islam

Demand  Demand indicates how much of a good consumers are both willing and able to buy at each possible price during a given time period, other things constant. If you demand something, then you 1. Want it, 2. Can afford it, and 3. Have made a definite plan to buy it. 4 4w/9/2013 Dr. Mazharul Islam

Quantity Demand  Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy.  The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price. 5 4w/9/2013 Dr. Mazharul Islam

Law of Demand  An inverse relationship exists between price and quantity demanded when other things remaining the same. As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls 6 4w/9/2013 Dr. Mazharul Islam

Law of Demand  Why does a change in the price change the quantity demanded? Two reasons:  Substitution effect  Income effect 7 4w/9/2013 Dr. Mazharul Islam

Law of Demand  Substitution Effect When the price of a good falls, its relative price makes consumers more willing to purchase this good. Alternatively, when the price of a good increases, its relative price makes consumers less willing to purchase this good.  For example, when the price of Al-Baik declines while other prices remain constant, Al-Baik becomes relatively cheaper  consumers are more willing to purchase Al-Baik when its relative price falls  they tend to substitute Al-Baik for other goods. 8 4w/9/2013 Dr. Mazharul Islam

Law of Demand Income Effect: When the price of a good decreases, a person’s real income increases  increased ability to buy a good  increase in quantity demanded. When the price of a good increases  real income declines  reduces the ability to buy a good  decline in quantity demanded 9 4w/9/2013 Dr. Mazharul Islam

Demand Curve and Demand Schedule  A demand curve shows the relationship between the quantity demanded of a good and its price during a given period when other things are constant. 10 4w/9/2013 Dr. Mazharul Islam $ DEMAND SCHEDULE Various Amounts A Series of Possible Prices …a specified time period …other things being equal PQDQD

Demand Curve and Demand Schedule 11 4w/9/2013 Dr. Mazharul Islam P Q o $ PQDQD $ D Price of Corn Quantity of Corn CORN

A Change in Demand (Determinants or Factors of Demand)  Six main factors (determinants) that change demand are  The prices of related goods [ Substitutes (can serve as replacements for one another) & Complements (go together)]  Expected future prices  Income  Expected future income and credit  Population (number of buyers and consumers)  Preferences (tastes) 12 4w/9/2013 Dr. Mazharul Islam

A Change in Demand (Determinants or Factors of Demand) Changes in the prices of related goods  For substitutes goods, if an increase in the price of one the demand for the other increase and demand curve shifts to rightward and, conversely, if a decrease in the price of one shifts the demand for the other good leftward (Example: Pepsi & Coca Cola)  For complementary goods, if an increase in the price of one shifts the demand for the other leftward and a decrease in the price of one shifts the demand for the other rightward (car & petrol). 13 4w/9/2013 Dr. Mazharul Islam

A Change in Demand (Determinants or Factors of Demand) Changes in Expected Future Prices, Income, & Credit  A change in consumer expectations with respect to future prices, future incomes & credit shifts current demand  If individuals expect income to increase in the future, current demand increases and demand curve shift rightward. Vice versa also true.  If individuals expect prices to increase in the future, current demand increases and demand curve shift rightward. Vice versa also true. 14 4w/9/2013 Dr. Mazharul Islam

A Change in Demand (Determinants or Factors of Demand) Changes in Consumer Income  Normal goods: the demand increases when income increases and demand curve shift rightward. The demand decreases when income decreases and demand curve shift leftward (example: New car).  Inferior goods: the demand decreases when income increases and demand curve shift leftward. The demand increases when income decreases and demand curve shift rightward (example: Used car) 15 4w/9/2013 Dr. Mazharul Islam

A Change in Demand (Determinants or Factors of Demand) Changes in Preference (Taste)  A favorable change in consumer preferences means If consumer preferences increase for a particular good then more of this good will be demanded at each price. Demand will increase and demand curve will shift rightward.  An unfavorable change in consumer preferences will decrease demand and demand curve will shift leftward. 16 4w/9/2013 Dr. Mazharul Islam

A Change in Demand (Determinants or Factors of Demand) Changes in Population (number of buyers or consumers)  Increase in the number of consumers  increase in market demand it means market demand curve will shift rightward.  Decrease in the number of consumers  decrease in market demand it means market demand curve will shift leftward. 17 4w/9/2013 Dr. Mazharul Islam

A Change in Demand (Determinants or Factors of Demand) 18 4w/9/2013 Dr. Mazharul Islam P Q o $ PQDQD $ D Price of Corn Quantity of Corn CORN D’ Increase in Demand Increase in Quantity Demanded

A Change in Demand (Determinants or Factors of Demand) Changes in Taste (or Preference)  It is nothing more than your likes and dislikes as a consumer. Moreover, it refers consumer preferences. A favorable change in consumer preferences means If consumer preferences increase for a particular good then more of this good will be demanded at each price. Demand will increase and demand curve will shift rightward. 19 4w/9/2013 Dr. Mazharul Islam

A Change in Demand (Determinants or Factors of Demand) Changes in Taste (or Preferences)  An unfavorable change in consumer preferences will decrease demand and demand curve will shift leftward. 20 4w/9/2013 Dr. Mazharul Islam

Now it’s over for today. Do you have any question? 21 3w/9/2013 Dr. Mazharul Islam