1. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen CHAPTER 3 DEMAND ANALYSIS 2 nd Semester, S.Y 2013 – 2014

2. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Demand  Demand is the willingness and ability of an individual to buy a good or service at various conditions  Desired demand and effective demand  Demand for a product is the amount of the good or service that buyers in a market are willing and able to pay per unit of time, ceteris paribus (others variables remain constant).

3. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Demand vs. Quantity Demanded  Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time.  The quantity demanded is the amount of a product that people are willing and able to purchase at one, specific price.

4. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen The Law of Demand Law of demand – there is an inverse relationship between price and quantity demanded. –Quantity demanded rises as price falls, other things constant. –Quantity demanded falls as prices rise, other things constant.

5. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen What Accounts for the Law of Demand? Two Reasons Why Buyers Buy More at Lower Prices and Less at Higher Prices  The Substitution Effect  The Income Effect

6. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Substitution Effect  Change in consumption of a good associated with a change in its price, with the level of utility held constant  People tend to substitute for goods whose price has gone up.

7. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Income Effect  When the price of a product decreases, ceteris paribus, consumers have more relative income. They can, therefore, purchase additional products (and vice versa).  Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant.

8. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Economic Models in Demand Analysis  Demand Schedule  Demand Curve  Demand Function

9. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Demand Schedule Demand schedule  a table that shows the relationship between the price of a good and the quantity demanded.  This reflects the various quantities of the product that will be bought at various prices at a specific time and place. It can be an individual or a market demand schedule.  Market demand schedule is the sum of all the individual demands for a particular good

10. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Price per kilo ABCDEABCDE A. Individual Demand Schedule for Onions in Pangasinan Onions demanded per week 50 40 30 20 10 1234512345 A Sample Demand Schedule Price per kilo ABCDEABCDE B. Market Demand Schedule for Onions in Pangasinan Onions demanded per week 50 40 30 20 10 20 40 60 80 100

11. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen The Demand Curve  The demand curve is the graphical representation of the law of demand.  The demand curve slopes downward and to the right.  As the price goes up, the quantity demanded goes down.

12. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen D Price (per unit) 0 Quantity demanded (per unit of time) PAPA QAQA A A Sample Demand Curve

13. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Price per DVDs (in dollars) B. Demand Curve Quantity of Onions demanded (per week) 20406080 100 60 50 40 30 20 10 0 A B C D From a Demand Table to a Demand Curve Demand for Onions Price per kilo ABCDEABCDE A. Market Demand Schedule for Onions in Pangasinan Onions demanded per week 50 40 30 20 10 20 40 60 80 100 E

14. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Let’s Check Your Understanding  Construct a hypothetical demand individual schedule for Juan’s demand for a branded t-shirt. Graph the constructed schedule.  Construct a hypothetical market demand schedule for the demand for Android tablets in Metro Manila. Graph the constructed schedule

15. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Let’s Check Your Understanding Price ABCDEABCDE A. Juan’s Individual Demand Schedule for a branded T-shirt T-shirts demanded per week 800 600 400 200 100 1234412344 Price ABCDEABCDE B. Market Demand Schedule for Android Tablets in Dagupan City Android Tablets demanded per week 25,000 20,000 15,000 10,000 5,000 20 40 60 80 100

16. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Let’s Check Your Understanding

17. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen  Demand Function shows the relationship between the quantity demanded and the price of the good (and other factors). In simple terms, quantity demanded is a function of price…[Qd = f (P…) ].  In the given schedule, the demand equation can be derived using the two-point form in finding the equation of a line. Demand Function Price per kilo ABCDEABCDE A. Individual Demand Schedule for Onions in Pangasinan Onions demanded per week 50 40 30 20 10 1234512345

18. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Ceteris Paribus  Ceteris Paribus places a limitation on the application of the law of demand.  It allows analysis of the effect of a change in one factor by holding all other relevant factors unchanged. –All other factors that affect quantity demanded are assumed to remain constant, whether they actually remain constant or not. –These factors may include changing tastes, prices of other goods, income, etc.

19. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen  Demand  refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant. Graphically, it refers to the entire demand curve.  Quantity demanded  refers to a specific amount that will be demand per unit of time at a specific price. Graphically, it refers to a specific point on the demand curve. Change in Demand vs. Change in Quantity Demanded

20. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Change in quantity demanded  caused by a change in the price of a good.  the movement of points within the same demand curve, the changes in the quantities demanded is brought about by the changes in prices. Change in demand  the changes in the quantity demanded brought about by any of the non-price determinants of demand and not by price (which is constant). Change in Demand vs. Change in Quantity Demanded

21. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded. Shifts in Demand vs. Movements Along a Demand Curve A shift in demand is the graphical representation of the effect of anything other than price on demand.

22. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Change in Quantity Demanded D1D1 Change in quantity demanded (a movement along the curve) B 0 Price (per unit) Quantity demanded 100 50 25 200 A

23. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen D0D0 D1D1 Shift in Demand Price (per unit) Quantity demanded 100 50 25 200 B A Change in demand (a shift of the curve) 250

24. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement along the demand curve. A. A store owner finds that customers are willing to pay more for umbrellas on rainy days. B. When XYZ Telecom, a long-distance telephone service provider, offered reduced rates on weekends, its volume of weekend calling increased sharply. C. People buy more long-stem roses the week of Valentine’s Day, even though the prices are higher than at other times during the year. D. A sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline purchases. Let’s Check Your Understanding!

25. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Let’s Check Your Understanding! Determine whether the following will have effect on the change in the quantity demanded or change in demand? 1.There is an increase in the price of gasoline per liter from P40 to P50. 2. The demand for laptops declines due to the mass distribution of affordable tablets in Metro Manila. 3. The price of Fuji apples falls, thus a market goer buys more. 4. The price of sugar (a complement) increases. Eventually, the weekly demand for milk tea decreases. 5. When the price of beef rises, consumers tend to increase their purchases for pork.

26. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Let’s Check Your Understanding! Which of these curves represents change in demand and change in quantity demanded?

27. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Determinants of Demand Tastes Income Number of buyers Expectations Prices of related goods

28. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Non-price Determinants of Demand Demand Shifters are factors that cause shifts in the demand curve: –Income –The prices of related good –Tastes and Preferences –Expectations –Number of Buyers –Others

29. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Consumer Income Aside from price, income is a major determinant influencing the decision of the consumer on how much to demand for a good or a service. Basically, with higher income, the more the tendency for a consumer to demand for more goods and services, and that the lesser the income, the lesser is the demand. Normal goods – demand varies directly with income. Demand for a good rises when income rises and demand for a good falls when income falls. Inferior goods – demand for a good rises when income falls and demand for a good falls when income rises

30. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Increase in Demand Decrease in Demand Income (Normal Good) – Shift in the DC

31. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Increase in Demand Decrease in Demand Income (Inferior Good) – Shift in the DC

32. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Prices of Related Goods  When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.  When a fall in the price of one good increases the demand for another good, the two goods are called complements.  Substitutes – are often pairs of goods that are used in place of each other.  Complements - are pairs of goods that are used together.

33. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Let’s Check Your Understanding Determine whether the following pairs of goods are substitutes or complements. 1.LED TV and Plasma TV 2.Knorr Cubes or Magic Sarap Granules 3.Coffee and Creamer 4.Laptop and Tablet 5.PC and Sofware 6.Gasoline and Automobiles 7.DSLR and Lens

34. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Increase in Demand Decrease in Demand PRR (Substitutes) – Shift in the DC

35. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Increase in Demand Decrease in Demand PRR (Complements) – Shift in the DC

36. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Tastes and Preferences  Why do people want what they want?  The most obvious determinant of demand. If one likes a good, he buys more of it.  Economists usually lump together changes in demand due to fads, beliefs, cultural shifts, and so on under the heading of changes in tastes or preferences.

37. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Increase in Demand Decrease in Demand Tastes and Preferences – Shift in the DC

38. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Expectations (Price and Income)  When consumers have some choice about when to make a purchase, current demand for a good is often affected by expectations about its future price. Alternatively, expectations of a future rise in price are likely to cause an increase in demand today.  Expected changes in future income can also lead to changes in demand: if you expect your income to rise in the future, you will typically borrow today and increase your demand for certain goods; if you expect your income to fall in the future, you are likely to save today and reduce your demand for some goods.

39. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Increase in Demand Decrease in Demand Price Expectation – Shift in the DC

40. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Increase in Demand Decrease in Demand Income Expectation – Shift in the DC When the income is expected to rise in the future When the income is expected to fall in the future

41. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Number of Buyers  An increase in the number of buyers in a specific place or market results to an increase in demand for a good, and vice versa

42. BACHELOR OF ARTS IN ECONOMICS ECON 111 – ECONOMIC ANALYSIS Pangasinan State University Social Science Deparment – PSU Lingayen Increase in Demand Decrease in Demand Number of Buyers – Shift in the DC