1. CHAPTER 4 : THE THEORY OF DEMAND

2. Price and Opportunity Cost
Price is the number of dollars that must be given up in exchange for an item — this is referred to as the money price.
The ratio of one price to another is referred to as the relative price.
Relative prices are opportunity costs.

3. Price and Opportunity Cost
Relative Prices
price index
Supply and demand determines relative prices.
“Price falling” means the price falls relative to the average price of other goods and services. 6

4. Demand If a person demands something, they:
Want it.
Can afford it.
Have made a definite plan to buy it.
Wants are the unlimited desires or wishes that people have for goods and services. 9

5. Demand
The quantity demanded of a good or service is the amount that consumers plan to buy during a given time period at a particular price. 10

6. Demand What determines buying plans? The price of the good
The prices of related goods
Expected future prices
Income
Population
Preferences 11

7. Demand The Law of Demand Reasons for the Law of Demand
Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded.
Reasons for the Law of Demand
Substitution Effect
Income Effect 12

8. Demand Demand Curve and Demand Schedule
Demand curves show the relationship between the quantity demanded of a good and its price (ceteris paribus).
Demand schedules list the quantities demanded at each different price (ceteris paribus). 13

9. Demand Price Quantity a 1 9 b 2 6 c 3 4 d 4 3 e 5 2
(dollars per tape) (millions of tapes per week)
a 1 9
b 2 6
c 3 4
d 4 3
e 5 2
Instructor Notes:
1) The table shows a demand schedule listing the quantity of tapes demanded at each price if all other influences on buyers’ plans remain the same.
2) At a price of $1 a tape, 9 million tapes a week are demanded; at a price of $3 a tape, 4 million tapes a week are demanded. 14

10. Demand e d c b a 6 5 4 3 Demand for tapes 2 1 0 2 4 6 8 10
Price (dollar per tape) c 3 b
Demand for tapes 2
Instructor Notes:
1) The demand curve shows the relationship between quantity demanded and price, everything else remaining the same.
2) The demand curve slopes downward: As price decreases, the quantity demanded increases.
3) The demand curve can be read in two ways. For a given price, it tells us the quantity that people plan to buy. For example, at a price of $3 a tape, the quantity demanded is 4 million tapes a week.
4) For a given quantity, the demand curve tells us the maximum price that consumers are willing and able to pay for the last tape available. For example, the maximum price that consumers will pay for the 6 millionth tape is $2. a 1
Quantity (millions of tapes per week) 17

11. DEMAND IN THE CONSTRUCTION INDUSTRY
Demand for Housing
The owner occupied sector
The private rented sector
The local authority rented sector
The registered social landlord sector

12. Demand for owner occupied housing:
Table 4.1 factor affecting demand for owner-occupied housing
The current price of housing
The price of other forms of housing
Income and expectations of change
Cost of borrowing money and expectations of change
Government incentives such as tax benefits
Demographic factors such as the number of households
Price of associated goods and services, such as maintenance, furniture, council tax, insurance, etc.

13. DEMAND FOR SOCIAL HOUSING
Table 4.3 Factors affecting demand for social housing
The current price (rent) of social housing
The price level of other forms of tenure
Assessment of need
Availability of finance, such as income support and mortgages
Levels of government subsidy

14. Technological developments Changes in taste or fashion
Table 4.4 Factors affecting demand for industrial and commercial buildings
Technological developments
Changes in taste or fashion
Expected levels of cost, including interest rates
The state of the economy and government policy
Business confidence
The age and condition of existing premises

15. Assessment of need-present and future
Table 4.5 Factors affecting demand for infrastructure and public sector construction
Assessment of need-present and future
Availability of finance and levels of government subsidy
Government policy
The age and condition of the existing stock

16. Table 4.6 Factors affecting demand for repair and maintenance
The current cost of repair and maintenance
The cost of new building
Level of current income
Government policy associated with heritage and conservation, etc
The age and condition of existing stock (and its state of disrepair)
The ownership pattern, since owner-occupied property tends to be better maintained

17. A GENERALISED DEMAND EQUATION
Q=f(P, Pn-1,Y, G, …..)

18. Demand A Change in Demand
When any factor that influences buying plans other than the price of the good changes, there is a change in demand.
An increase in demand causes the demand curve to shift rightward.
A decrease in demand causes the demand curve to shift leftward. 18

19. A Change in Demand Price of Related Goods
Substitutes - goods used in the place of another good
Complements - goods used in conjunction with another good
What Happens to Demand if the price of a substitute good increases? A complement? 19

20. A Change in Demand Expected Future Prices
If the price of a good is expected to rise in the future, people buy more of the good now.
If the price of a good is expected to fall in the future, people buy less of the good now. 19

21. A Change in Demand Income
Normal Goods — demand increases as income increases
Inferior Goods — demand decreases as income increases 20

22. A Change in Demand Population Preferences
Size and age structure
Preferences
Attitudes toward goods and services 21

23. Quantity Price Quantity Price a 1 9 b 2 6 c 3 4 d 4 3 e 5 2
Original demand schedule
New demand schedule
Walkman $200
Walkman $50
Quantity
Price
Quantity
Price
(dollars
per tape)
(dollars
per tape)
(millions of tapes
per week)
(millions of tapes
per week) a
Assume the original price of
Walkmans is $200. The
demand schedule shows
the Price-Quantity
relationship for tapes. b c d e

24. Quantity Price Quantity Price a' 1 a 1 9 13 b 2 6 b' 2 10 8 c 3 4 c' 3
Original demand schedule
New demand schedule
Walkman $200
Walkman $50
Quantity
Price
Quantity
Price
(dollars
per tape)
(dollars
per tape)
(millions of tapes
per week)
(millions of tapes
per week)
a' 1 a 13 b
b' 2 10 8 c
c' 3 d 7
d' 4 e
e' 5 6

25. Demand 6 e' d' c' b' a'
Demand for tapes
(Walkman $50) 5 e d c b a 4
Price (dollar per tape) 3 2
Demand for tapes
(Walkman $200) 1
Quantity (millions of tapes per week) 25

26. The Demand for Tapes The Law of Demand The quantity of tapes demanded
Decreases if:
The price of a tape rises.
Increases if:
The price of a tape falls. 27

27. The Demand for Tapes Changes In Demand The demand for tapes
Decreases if:
The price of a substitute falls.
The price of a complement rises.
Income falls (a tape is a normal good).
The population decreases.
The price of a tape is expected to fall in the future. 28

28. The Demand for Tapes Changes In Demand
The demand for tapes Increases if:
The price of a substitute rises.
The price of a complement falls.
Income rises (a tape is a normal good).
The population increases.
The price of a tape is expected to rise in the future. 29

29. A Change in the Quantity Demanded Versus a Change in Demand
A movement along a demand curve, which results from a change in price, shows a change in the quantity demanded.
If some other influence on buyers’ plans changes, holding price constant, there is a change in demand. 30

30. A Change in the Quantity Demanded Versus a Change in Demand
Price
Decrease in
quantity
demanded D1 D2
Decrease in
demand
Increase in
demand
Increase in
quantity
demanded D0
Quantity 36

31. ELASTICITY OF DEMAND
A measurement of the degree of responsiveness of demand to a change in an external variable
Ed= percentage change in demand/percentage change in explanatory variable