2. Demandslide 1 MODEL OF DEMAND The model of demand is an attempt to explain the amount demanded of any good or service. DEMAND DEFINED The amount of a good or service a consumer wants to buy, and is able to buy per unit time.

3. Demandslide 2 THE “STANDARD” MODEL OF DEMAND The DEPENDENT variable is the amount demanded. The INDEPENDENT variables are: the good’s own price the consumer’s money income the prices of other goods preferences (tastes)

4. Demandslide 3 YOU COULD WRITE THE MODEL THIS WAY: The demand for tacos Q D (tacos) = D(P tacos, Income, P spaghetti, P beer, tastes)

5. Demandslide 4 ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENT VARIABLE AFFECT THE AMOUNT DEMANDED

6. Demandslide 5 THE DEMAND CURVE The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand. The DEPENDENT variable is the quantity demanded. The INDEPENDENT variable is the good’s own price.

7. Demandslide 6 THE LAW OF DEMAND The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand. The Law of Demand says that demand curves are negatively sloped.

8. Demandslide 7 A DEMAND CURVE A demand curve must look like this, i.e., be negatively sloped. own price quantity demanded demand Market for tacos

9. Demandslide 8 The demand curve means: You pick a price, such a p 0, and the demand curve shows how much is demanded. own price quantity demanded demand p0p0 Q0Q0 Market for tacos

10. Demandslide 9 What if the price of tacos were less than p 0 ? How do you show the effect on demand? Go to hidden slide

11. Demandslide 10 At a lower price, consumers want to buy more. own price quantity demanded demand p0p0 Q0Q0 p lower Q1Q1 Market for tacos

12. Demandslide 11 AN IMPORTANT POINT When drawing a demand curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis.

13. Demandslide 12 Other factors affecting demand The question here is how to show the effects of changes in income, other goods’ prices, and tastes on demand.

14. Demandslide 13 Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the good’s own price. own price quantity of beer demand @ I = $1000 Market for beer How does this affect the demand curve? How does this affect the demand curve? $1/can Go to hidden slide

15. Demandslide 14 This is a change in demand. It shows up as a shift to the right of the original demand curve. own price quantity demand @ I = $1000 Market for beer $1/can demand @ I = $2000

16. Demandslide 15 Normal and inferior goods defined Normal good: When an increase in income causes an increase in demand. Inferior good: When an increase in income causes a decrease in demand.

17. Demandslide 16 Pizza is a normal good. own price quantity demand @ I = $1000 Market for pizza What’s the effect on the demand curve for pizza if income rises to $2,000? What’s the effect on the demand curve for pizza if income rises to $2,000? Go to hidden slide

18. Demandslide 17 An increase in income increases demand when pizza is normal. own price quantity demand @ I = $1000 demand @ I = $2000 Market for pizza

19. Demandslide 18 Suppose instead that pizza was an inferior good. own price quantity demand @ I = $1000 Market for pizza What’s the effect on the demand curve for pizza if income rises to $2,000? What’s the effect on the demand curve for pizza if income rises to $2,000? Go to hidden slide

20. Demandslide 19 If pizza were inferior the demand would decrease as income increases. Whether a good is normal or inferior is a matter of fact, not theory. price quantity demand @ I = $1000 demand @ I = $2000 Market for pizza

21. Demandslide 20 Substitutes defined Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other. Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.

22. Demandslide 21 The graph shows the demand curve for spaghetti when pizzas cost $10 each. own price quantity demand @ pizza price of $10 Market for spaghetti What’s the effect of an increase in the price of pizza to $15? What’s the effect of an increase in the price of pizza to $15? Go to hidden slide

23. Demandslide 22 An increase in the price of pizza, a substitute for spaghetti, causes an increase in demand for spaghetti. own price quantity demand @ pizza price of $10 Market for spaghetti demand @ pizza price of $15.

24. Demandslide 23 Complements defined Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. Thus, an increase in the price of pizza would decrease the demand for beer if the goods were complements.

25. Demandslide 24 The graph shows the demand curve for beer when pizzas cost $10 each. price of beer quantity demand @ pizza price of $10 Market for beer What is the effect on the market for beer of an increase in the price of pizza to $15? What is the effect on the market for beer of an increase in the price of pizza to $15? Go to hidden slide

26. Demandslide 25 When beer and pizza are complements, an increase in the price of pizza decreases the demand for beer. price of beer quantity demand @ pizza price of $10 demand @ pizza price of $15. Market for beer

27. Demandslide 26 The graph shows the demand curve for umbrellas on sunny days. price of umbrellas quantity demand on sunny days Market for umbrellas What’s the effect on demand of it being a rainy day? What’s the effect on demand of it being a rainy day? Go to hidden slide

28. Demandslide 27 This is an example of a change in tastes. Demand increases. price of umbrellas quantity demand on sunny days demand on rainy days Market for umbrellas

29. Demandslide 28 DEMAND SUMMARY Demand is a function of own-price, income, prices of other goods, and tastes. The demand curve shows demand as a function of a good's own price, all else constant. Changes in own-price show up as movements along a demand curve. Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve.