1. ECON 100 Lecture 9
Monday, March 3

4. MARCH 22 Saturday starts at 10:00
MIDTERM EXAM #1

5. Demand and Supply – Theory
web link to chapter 4 (publisher’s website, perfectly legal)

6. SUPPLY AND DEMAND : HOW MARKETS WORK

7. This is perhaps the most important chapter in the textbook
This is perhaps the most important chapter in the textbook. Learn this chapter well! It will make it easier to learn the rest of the material. This is also one of the longest chapters in the textbook, and this PowerPoint file is one of the most graph-intensive.

8. Not all of us can easily work with graphs, which are critically important in this and all later chapters in the book. So, … this lecture’s slides have detailed animations that build many of the graphs with great care. Especially, the graph of the demand or supply curves!

9. Demand, defined
A very general definition: Demand relates the amounts people want to obtain to the sacrifices they must make.

10. The textbook definition of demand is that …
Demand is a relationship between two variables: Price and the quantity demanded. What is quantity demanded?

11. The definition of “quantity demanded”
It is a fancy term for “the amount people want to obtain.” The quantity demanded of a good is the amount that buyer(s) are willing and able (have the resources –money) to purchase.

12. The determinants of quantity demanded are …
The price of the good itself
Consumer’s Income (normal goods, inferior goods)
Prices of related goods [substitute goods; complement goods]
Taste
Expectations

13. Let’s for a moment…
Ignore the others, and focus on the price of the good. There are two ways of displaying the relationship between price and quantity demanded: As a table/schedule As a graph

14. The Demand Schedule: The Relationship between Price and Quantity Demanded
The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded, with other variables, such as income, prices of other goods, etc., kept constant. 17

15. Zeynep’s Demand Schedule
Price of Ice-cream cone
(in )
Quantity of Ice-cream cones demanded
0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00

16. The Demand Curve: The Relationship between Price and Quantity Demanded
The demand curve is a graph That shows the relationship between the price of a good and the quantity demanded, with other variables, such as income, prices of other goods, etc., kept constant. 17

17. Zeynep’s Demand Curve for ice-cream Demand Schedule
Price of
Ice-Cream Cone
3.00
2.50
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream Cones

18. Your turn now!

19. a. Draw the graph of the demand curve.
The demand schedule show prices and quantities in the market for corn. The quantity demanded is QD.
a. Draw the graph of the demand curve.
Price QD

20. Draw the demand curve
Price QD …
200
250
300

21. The law of demand
The law of demand is the claim that, other things being equal (ceteris paribus in Latin),
if the price of a good rises, the quantity demanded falls
P↗  QD↘
if the price of a good falls, the quantity demanded rises.
P ↘  QD ↗

22. The original version of the Law of Demand (by Alfred Marshall)
"There is then one general law of demand: …
The greater the amount to be sold, the smaller must be the price
at which it is offered in order that it may find purchasers;
or, …
in other words, …
the amount demanded increases with a fall in price, and…
diminishes with a rise in price.“
Alfred Marshall, ( ) Principles of Economics, 8th edition (London: Macmillan, 1920), 99 [originally published in 1890]

23. A change in quantity demanded
Price of Ice-Cream Cones
Suppose that for whatever reason, the price of ice-cream goes up.
The higher price of ice-cream causes a decrease in quantity demanded. B
2.00
We show this change as a movement along the demand curve. A
1.00 D 4 8
Quantity of Ice-Cream Cones

24. Market Demand versus Individual Demand

25. The market demand is obtained by summing up the individual demands.

26. The market demand curve is the horizontal sum of the individual demand curves!
When the price is 2.00, Zeynep will demand 4 ice-cream cones.
When the price is 2.00, Emre will demand 3 ice-cream cones.
The market demand at 2.00 will be 7 ice-cream cones. +
Zeynep’s Demand
Emre’s Demand =
Market Demand
Price of Ice-Cream Cone
Price of Ice-Cream Cone
Price of Ice-Cream Cone
2.00
2.00
2.00
1.00
1.00
1.00 13 4 8 3 5 7
Quantity of Ice-Cream Cones
Quantity of Ice-Cream Cones
Quantity of Ice-Cream Cones
When the price is 1.00, Zeynep will demand 8 ice-cream cones.
When the price is 1.00, Emre will demand 5 ice-cream cones.
The market demand at 1.00, will be 13 ice-cream cones.

27. Question #1: Find the market demand
Price
Aaron
Angela
Austin
Alyssa
$0.00 20 16 4 8
0.50 18 12 6
1.00 14 10 2 5
1.50
2.00
2.50
When the price of the good is $1.00, the quantity demanded in this market is ______ units.
Whose demand does not conform to the law of demand?
If the price increases from $1.00 to $1.50, the quantity demanded in the market decreases/increases by ______ units.

28. Before we go on to more confusing stuff like “a change in demand” v
Before we go on to more confusing stuff like “a change in demand” v. “shifts in the demand curve”, etc.,
please remember that … when the price of the product changes, there will be a change in quantity demanded. We show this change as a movement along the demand curve. 19

29. A decrease in price causes an increase in quantity demanded…
Price of Ice-Cream Cones B
2.00 A
1.00 D 4 8
Quantity of Ice-Cream Cones

30. A change in demand vs. a change in quantity demanded
Change in Demand is caused by a change in consumer’s income, the prices of other goods, consumer’s taste for the product, etc., and is shown as a shift in the demand curve.

31. A change in demand is shown as a shift in the demand curve
Price of
Ice-Cream
Cones
Increase
in demand
Decrease
in demand
Demand
curve, D 2
Demand
curve, D 1
Demand curve, D 3
Quantity of
Ice-Cream Cones

32. A change in demand can be …
An increase in demand! An increase in demand means that the quantity demanded is higher at every price level. It is shown as a shift in the demand curve to the right.

33. Shifts in the Demand Curve
Price of
Ice-Cream
Cones
Increase
in demand
Demand
curve, D 2
Demand
curve, D 1
Quantity of
Ice-Cream Cones

34. A change in demand can also be …
A decrease in demand! A decrease in demand means that the quantity demanded is lower at every price level. It is shown as a shift in the demand curve to the left.

35. Shifts in the Demand Curve
Price of
Ice-Cream
Cones
Decrease
in demand
Demand
curve, D 1
Demand curve, D 3
Quantity of
Ice-Cream Cones

36. A change in demand vs. a change in quantity demanded
A Change in Demand is
A shift in the demand curve, either to the left or right.
Caused by a change in consumer’s income., prices of other goods, taste, etc.,
A Change in Quantity Demanded is
A movement along the demand curve.
Caused by a change in the price of the product.

37. Change in Demand
Change in Quantity Demanded

38. One more time: What makes the demand curve shift?
A change in
Consumer income
Prices of related goods
Consumer’s tastes
Expectations
For market demand (sum of individual demand curves) also the number of buyers!
Market demand increases (shifts to the right) when the number of consumers increase. 11

39. Shifts in the Demand Curve : Consumer Income
As income increases the demand for a normal good increases. As income decreases the demand for a normal good decreases. This is the definition of a normal good: A good for which demand increases (falls) as income increases (declines) is a normal good.

40. Consumer Income Normal Goods
Price of Ice-Cream Cones
3.00
An increase in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50 D2 D1
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12

41. Shifts in the Demand Curve : Consumer Income
As income increases the demand for an inferior good decreases. As income decreases the demand for an inferior good increases. This is also the definition of an inferior good: A good for which demand decreases as income increases is an inferior good.

42. Consumer Income Inferior Goods
Price of Ice-Cream Cones
3.00
2.50
An increase in income...
2.00
Decrease
in demand
1.50
1.00
0.50 D2 D1
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12

43. Your turn now

44. 4. An inferior good is one for which demand…
is low because of the low quality of the good.
rises as incomes rise.
is high because the good must be replaced often.
is unrelated to income.
falls as income rises.

45. The demand schedule show prices and quantities in the market for corn
The demand schedule show prices and quantities in the market for corn. The quantity demanded is QD.
b. What happens to the demand schedule if incomes rise, and corn is a normal good? Fill out some numbers in the table above.
Price QD QD (incomes rise)

46. More shifts in the demand curve
Prices of “related” goods

47. Shifts in the Demand Curve: Prices of Related Goods
Goods can be related in two ways: Two goods can be complements. like computers and software or Two goods can be substitutes. like white cheese and yellow cheese.

48. Shifts in the Demand Curve: Prices of Related Goods
Complement goods
Cars – gasoline
Tennis balls – tennis rackets
Computers – software
Tablets – apps
Simit – peynir, Köfte – ekmek, Tahin – pekmez
Doktor – sigara + fried food
Demand for a good will increase if the price of the complement good falls.
Demand for a good will decrease if the price of the complement good increases.

49. D1 Price of related good : Complement goods 3.00 2.50
A Sip and a Cone: 5 Luscious Wine and Ice Cream Pairings
Price of Ice-Cream Cone
3.00
2.50
An increase in the price of a complement good, like ??????
2.00
1.50
1.00
0.50 D1
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12

50. in demand for ice-cream
Price of related good : Complement goods
Price of Ice-Cream Cone
3.00
2.50
An increase in the price a nicely chilled glass of white wine causes a…
2.00
Decrease
in demand for ice-cream
1.50
1.00
0.50 D2 D1
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12

51. Shifts in the Demand Curve: Prices of Related Goods
Substitute goods
Pepsi – Coca Cola
Olive oil – vegetable oil
Notebook computers – netbook computers
Beyaz peynir – kaşar peyniri
Keşkül – muhallebi
Demand for a good will increase if the price of the substitute good rises.
Demand for a good will decrease if the price of the substitute good decreases.

52. Price of a related good : Substitute goods
Price of Ice-Cream Cone
3.00
An increase in price of a substitute good, like frozen yogurt
2.50
Increase
in demand
2.00
1.50
1.00
0.50 D2 D1
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 8 9 10 11 12

53. Your turn now

54. Active learning – Demand curve
Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why?
The price of iPods falls
The price of music downloads falls
The price of CDs falls

55. One more…

56. 3. Which of the following is least likely to increase the demand for tea?
A new scientific study finds that hot tea cures colds and skin disorders.
A price war results in tea selling for $0.05/cup.
Teashops start giving free simit to their customers.
The price of a substitute (example: coffee) rises.

57. One more…

58. What is the effect of these events on the demand for small cars?
The price of large cars rises (the price of small cars is constant).
Consumers’ Incomes decline (small cars are an inferior good).
Small cars become more fashionable.
The price of small cars falls.

59. This one is the last…

60. one

61. Closing remarks
A bit confusing, but…

62. A change in demand vs. a change in quantity demanded
When the price of a good changes (for whatever reason)
this will cause a change in the quantity demanded,
but not cause a change in the demand for that good.

63. Shifts in the Demand Curve
Changes in consumers income
As income increases the demand for a normal good will increase. (Also, as income decreases the demand for a normal good will decrease.)
As income increases the demand for an inferior good will decrease. (Also, as income decreases the demand for an inferior good will increase.)

64. Shifts in the Demand Curve
Changes in the prices of related goods
When two goods are substitutes, a fall in the price of one good reduces the demand for the other one. (Also, a rise in the price of one good increases the demand for the other one.)
When two goods are called complements, a fall in the price of one good increases the demand for the other good. (Also, a rise in the price of one good decreases the demand for the other good.)

65. Last week’s end of lecture question about substitutes, health and omelets

66. Argue against one of these two statements
There is no substitute for good health.
There are no substitutes for eggs if you want an omelet.
using the ideas that “there are substitutes for everything”.

67. Possible answers Good health (substitutes for) Smoking Drinking
Watching TV (sedentary life style)
Bungee jumping
Mountain climbing
Eggs
Substitutes for eggs are all substitutes for omelettes (no one needs an omelette), such as cheese, pastırma, bread and butter, for breakfast, or salad and/or sandwich, soup, for a light lunch.

68. End of the lecture