© 2003 McGraw-Hill Ryerson Limited Demand Analysis Chapter 3

© 2003 McGraw-Hill Ryerson Limited Think like an Economist Teach a parrot the terms of supply and demand and you’ve got an economist. Thomas Carlyle

© 2003 McGraw-Hill Ryerson Limited Demand u Demand means a willingness and capacity to pay.

© 2003 McGraw-Hill Ryerson Limited Demand u Prices are the tool by which the market coordinates individual desires.

© 2003 McGraw-Hill Ryerson Limited The Law of Demand u Quantity demanded rises as price falls, other things constant. u Quantity demanded falls as price rises, other things constant. l Thus, there is an inverse relationship between price and quantity demanded.

© 2003 McGraw-Hill Ryerson Limited The Law of Demand u What accounts for the law of demand? u People tend to substitute other goods for goods whose price has increased.

© 2003 McGraw-Hill Ryerson Limited The Demand Curve u The demand curve is the graphic representation of the relationship between price and quantity demanded. u The demand curve slopes downward and to the right. l As the price goes up, the quantity demanded goes down.

© 2003 McGraw-Hill Ryerson Limited The Demand Curve u The negative slope tells us that quantity demanded varies indirectly—in the opposite direction—with price.

© 2003 McGraw-Hill Ryerson Limited Other Things Constant u “Other things constant” in our definition of demand means that all other factors that affect the analysis are assumed to remain constant, whether they actually remain constant or not. u These factors may include changing tastes, prices of other goods, even the weather.

© 2003 McGraw-Hill Ryerson Limited D Price (per unit) 0 Quantity demanded (per unit of time) PAPA QAQA A A Sample Demand Curve,

© 2003 McGraw-Hill Ryerson Limited Shifts in Demand Versus Movements Along a Demand Curve u Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant. u Graphically, it refers to the entire demand curve.

© 2003 McGraw-Hill Ryerson Limited Shifts in Demand Versus Movements Along a Demand Curve u Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price, other things constant. u Graphically, it refers to a specific point on the demand curve.

© 2003 McGraw-Hill Ryerson Limited Shifts in Demand Versus Movements Along a Demand Curve u A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded.

© 2003 McGraw-Hill Ryerson Limited Shifts in Demand Versus Movements Along a Demand Curve u A shift in demand is the graphical representation of the effect of anything other than price on demand. u The original curve will move to the right or to the left.

© 2003 McGraw-Hill Ryerson Limited Change in Quantity Demanded 0 D1D1 Change in quantity demanded (a movement along the curve) B Price (per unit) Quantity demanded (per unit of time) 100 $2 $1 200 A

© 2003 McGraw-Hill Ryerson Limited D0D0 D1D1 Shift in Demand Price (per unit) Quantity demanded (per unit of time) 100 $2 $1 200 B A Change in demand (a shift of the curve) 250

© 2003 McGraw-Hill Ryerson Limited Shift Factors of Demand u Shift factors of demand are factors that cause shifts in the demand curve to the right or left.

© 2003 McGraw-Hill Ryerson Limited Shift Factors of Demand u Shift factors of demand include—but are not limited to—the following: l Society's income l The prices of other goods l Tastes l Expectations l Population

© 2003 McGraw-Hill Ryerson Limited Shift Factors of Demand u A rise in income may increase demand for goods. u When the prices of substitute goods fall, you will consume less of the good whose price has not changed. u A change in taste will change demand without a change in price.

© 2003 McGraw-Hill Ryerson Limited Shift Factors of Demand u If you expect your income to rise, you may consume more now. u If you expect prices to fall in the future, you may put off purchases today.

© 2003 McGraw-Hill Ryerson Limited Shift Factors of Demand u If there is an increase in population, demand will increase at every price u With a population decrease, demand will decrease as well

© 2003 McGraw-Hill Ryerson Limited The Demand Table u The demand table assumes all the following: l As price rises, quantity demanded declines. l Quantity demanded has a specific time dimension to it.

© 2003 McGraw-Hill Ryerson Limited The Demand Table u The demand table assumes all the following: l All the products involved are identical in shape, size, quality, etc. l The schedule assumes that everything else is held constant.

© 2003 McGraw-Hill Ryerson Limited From a Demand Table to a Demand Curve u You plot each point in the demand table on a graph and connect the points to derive the demand curve.

© 2003 McGraw-Hill Ryerson Limited From a Demand Table to a Demand Curve u The demand curve graphically conveys the same information that is on the demand table.

© 2003 McGraw-Hill Ryerson Limited From a Demand Table to a Demand Curve u The curve represents the maximum price that you will pay for various quantities of a good—you will happily pay less.

© 2003 McGraw-Hill Ryerson Limited Price per cassette (in dollars) A Demand Curve Quantity of cassettes demanded (per week) $ E D C BF A From a Demand Table to a Demand Curve Price per cassette ABCDEABCDE A Demand Table Cassette rentals demanded per week $ Demand for cassettes G

© 2003 McGraw-Hill Ryerson Limited Individual and Market Demand Goods u A market demand curve is the horizontal sum of all individual demand curves. l This is determined by adding the individual demand curves of all the consumers (“demanders”).

© 2003 McGraw-Hill Ryerson Limited Individual and Market Demand Goods u In reality, the sellers do not add up individual demand curves. u They estimate total market demand for their product which becomes smooth and downward sloping curve.

© 2003 McGraw-Hill Ryerson Limited Individual and Market Demand Goods u The demand curve is downward sloping for the following reasons: l At lower prices, existing consumers buy more. l At lower prices, new consumers enter the market.

© 2003 McGraw-Hill Ryerson Limited From Individual Demands to a Market (1) Price per cassette $ (2) Marie’s demand (3) Pierre’s demand (2) Cathy’s demand (3) Market demand ABCDEFGHABCDEFGH Quantity of cassettes demanded per week 2 Cathy Pierre Marie D A C E F G $ Price per cassette (in dollars) B Market demand

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