Chapter 2 Demand p36-41 Chapter 2 Demand p36-41 DEMAND The relationship between demand and priceThe relationship between demand and price –the law of.

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Presentation transcript:

Chapter 2 Demand p36-41 Chapter 2 Demand p36-41

DEMAND The relationship between demand and priceThe relationship between demand and price –the law of demand

DEMAND The demand curveThe demand curve First we need some data on demand at different pricesFirst we need some data on demand at different prices

The demand curve: The demand for potatoes (monthly)

Total Market Demand Cureve for an Economy Total Market DemandTotal Market Demand = Add up all the individual demands= Add up all the individual demands Usually specify timeUsually specify time Total demand per yearTotal demand per year Or MonthOr Month Or Week etcOr Week etc

The demand curve: The demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Demand Price (pence per kg) 4 Market demand (tonnes 000s) 700 A Point A Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Demand Price (pence per kg) 4 8 Market demand (tonnes 000s) ABAB Point A B Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Demand Price (pence per kg) Market demand (tonnes 000s) ABCABC Point A B C Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Demand Price (pence per kg) Market demand (tonnes 000s) ABCDABCD Point A B C D Market demand for potatoes (monthly)

E Quantity (tonnes: 000s) Price (pence per kg) Demand Price (pence per kg) Market demand (tonnes 000s) ABCDEABCDE Point A B C D Market demand for potatoes (monthly) E

Quantity (tonnes: 000s) Price (pence per kg) Demand Price (pence per kg) Market demand (tonnes 000s) ABCDEABCDE Point A B C D E Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Demand Note when price rises, quantity demanded falls That is, move from A to E A B C D E Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Demand LAW of DEMAND Quantity demanded falls when price rises, ceteris paribus. A B C D E Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Demand Demand curve slopes down, Ceteris paribus A B C D E Market demand for potatoes (monthly)

Law of Demand Price is one of the most important determinants of demandPrice is one of the most important determinants of demand Sometimes we write:Sometimes we write: Q D =f(P)Q D =f(P) Or simplyOr simply Quantity is a function of PriceQuantity is a function of Price

Law of Demand Price is one of the most important determinants of demand andPrice is one of the most important determinants of demand and Quantity demanded falls as price risesQuantity demanded falls as price rises OROR Quantity demanded rises as price fallsQuantity demanded rises as price falls ………….. Ceteris paribus………….. Ceteris paribus i.e. Quantity and price are negatively relatedi.e. Quantity and price are negatively related So Quantity is a negative function of priceSo Quantity is a negative function of price

Quantity (tonnes: 000s) Price (pence per kg) Negative means Change in Q is positive When change in P is negative Market demand for potatoes (monthly) Means same thing as Demand curve slopes down

Quantity (tonnes: 000s) Price (pence per kg) Negative means Change in Q is positive When change in P is negative Market demand for potatoes (monthly) Means same thing as Demand curve slopes down

Quantity (tonnes: 000s) Price (pence per kg) Negative means Change in Q is positive When change in P is negative Market demand for potatoes (monthly) Means same thing as Demand curve slopes down

DEMAND So what does Ceteris Paribus mean,So what does Ceteris Paribus mean, ‘all other things held constant’‘all other things held constant’ So what are we holding constant?So what are we holding constant? Suggestions Please:Suggestions Please: number and price of other goodsnumber and price of other goods –income –distribution of income –tastes –expectations

DEMAND So P is important, but also other determinants of demand such asSo P is important, but also other determinants of demand such as –number and price of substitute goods –number and price of complementary goods –income –distribution of income –tastes –expectations

Price P OQ0Q0 Quantity D0D0 How do these other things affect the demand curve? Lets look at the effect of a Substitute

Price P OQ0Q0 Quantity D0D0 How do these other things affect the demand curve? Suppose the price of Rice were to rise, what would happen to the demand for Potatoes?

Price P0P0 O Q0Q0 Quantity D0D0 An increase in the price of a substitute At P 0 the quantity demanded would rise from Q 0 to Q 1 Q1Q1

Price P OQ0Q0 Quantity D0D0 An increase in the price of a substitute The same thing would happen at all other prices …the demand for potatoes rise, when the price of rice rises.

Price P OQ0Q0 Quantity D0D0 An increase in the price of a substitute So Demand would rise at every price level. And the demand curve moves out D1D1

Price P OQ0Q0 Quantity D0D0 An increase in the price of a substitute..Causes the demand curve to SHIFT OUT D1D1

Demand What about a Complementary Good?What about a Complementary Good? Bangers and MashBangers and Mash Bangers Complement the PotatoesBangers Complement the Potatoes So what will happen if the price of Bangers were to rise?So what will happen if the price of Bangers were to rise?

Price P OQ0Q0 Quantity D0D0 An increase in the price of a Complement What happens when price of Bangers Rise? Demand for Potatoes fall.. And the demand curve for Potatoes shifts in

Price P OQ0Q0 Quantity D0D0 An increase in the price of a Complement …Causes the demand curve to SHIFT IN

Why are we emphasising the word SHIFTWhy are we emphasising the word SHIFT We said before that output was a function of price.We said before that output was a function of price. Q=f(P)Q=f(P) And when we drew the diagram we plotted the quantity purchased at each priceAnd when we drew the diagram we plotted the quantity purchased at each price

Price P OQ0Q0 Q1Q1 Quantity A Demand Curve D0D0

But of course we have already noted that other things effect demand,But of course we have already noted that other things effect demand, Q=f(P, ………..)Q=f(P, ………..) eg, price of rice P Reg, price of rice P R And price of Bangers P BAnd price of Bangers P B So should write our equation asSo should write our equation as Q=f(P, P R,P B,……..)Q=f(P, P R,P B,……..)

Price P OQ0Q0 Q1Q1 Quantity A Demand Curve D0D0 So when we change the price of the good PSo when we change the price of the good P Q=f(P, P R,P B,……..)Q=f(P, P R,P B,……..) We move along the curveWe move along the curve

Price P OQ0Q0 Quantity D0D0 D1D1 E.g. change price P R,E.g. change price P R, a substitutea substitute Q=f(P, P R,P B,……..)Q=f(P, P R,P B,……..) the SHIFTS curve outthe SHIFTS curve out But when we change the price of other goods, we SHIFT the curveBut when we change the price of other goods, we SHIFT the curve

Price P OQ0Q0 Quantity D0D0 Or if we change the price of a complement, P BOr if we change the price of a complement, P B Q=f(P, P R,P B,……..)Q=f(P, P R,P B,……..) We SHIFT the curve inWe SHIFT the curve in

So when we change the price of the good PSo when we change the price of the good P Q=f(P, P R,P B,……..)Q=f(P, P R,P B,……..) We Move ALONG CurveWe Move ALONG Curve When we change any other variableWhen we change any other variable Q=f(P, P R,P B, …….. )Q=f(P, P R,P B, …….. ) We SHIFT the curveWe SHIFT the curve

DEMAND Other determinants of demandOther determinants of demand –number and price of substitute goods –number and price of complementary goods –income –distribution of income –tastes –expectations Have not yet discussed effect of changes in IncomeHave not yet discussed effect of changes in Income

Effects of changes in Income on Demand Q=f(P, P R,P B, I, ……..)Q=f(P, P R,P B, I, ……..) I = IncomeI = Income What would your expect?What would your expect? For most goods (Normal Goods) demand increases as Income increaseFor most goods (Normal Goods) demand increases as Income increase But for some goods (Inferior Goods) demand falls as income increasesBut for some goods (Inferior Goods) demand falls as income increases –E.g. potatoes, rice

Price P OQ0Q0 Quantity D0D0 An increase in Income For a Normal Good Demand Shifts Out D1D1

Price P OQ0Q0 Quantity D0D0 An increase in Income For an INFERIOR good demand SHIFT IN

DEMAND In this module you learnt about:In this module you learnt about: The relationship between demand and priceThe relationship between demand and price –the law of demand –The effect of changes in other variables –Movements along versus shifts in the demand curve

DEMAND Demand functions: Some Mathematical Examples. Page of the textbookDemand functions: Some Mathematical Examples. Page of the textbook

D P Q (000s) Demand curve for equation: Q d = – 200P

P 5 Q d (000s) 9 Demand curve for equation: Q d = – 200P D P Q (000s)

P 5 10 Q d (000s) 9 8 Demand curve for equation: Q d = – 200P D P Q (000s)

P Q d (000s) Demand curve for equation: Q d = – 200P D P Q (000s)

P Q d (000s) Demand curve for equation: Q d = – 200P D P Q (000s)