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Demand Curves Supply and Demand is a way to show a model of a Competitive Market • Competitive Market is a market in which there are many buyers and sellers of the same good or service • The key feature of a competitive market is that no individual’s actions have a noticeable effect on the price at which the good or service is sold. • Supply and Demand models show the behavior of a competitive market • The five elements of the model are: – The demand curve – The supply curve – The set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift – The market equilibrium (includes the equilibrium price and equilibrium quantity) – The way the market equilibrium changes when the supply curve or demand curve shifts The Demand Curve • The demand schedule is a table that shows how much of a good or service consumers will want to buy at different prices • As price rises, quantity demanded falls – the actual amount consumers are willing to buy at a some specific price The curve that connects each of the points on the graph is called the demand curve – a graphical representation of the demand schedule, another way of showing the relationship between the quantity demanded and price The Law of Demand • The law of demand says that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service Shift of the Demand Curve • A shift of the demand curve is a change in the quantity demanded at any given price, representing by the change of the original demand curve to a new position, denoted by a new demand curve. Shifting of the Demand Curve Movement Along the Demand Curve • This is a change in the quantity demanded of a good that is the result of a change in that good’s price. • Example: – Fall of the price of coffee beans in 2002 (D1) from $1.50 to $1 per pound. Movement Along the Demand Curve Movement Along the Demand Curve • Remember: – “the demand for X has increased” or “the demand for Y decreased” it means that the demand curve for X or Y shifted – NOT…… that the quantity demanded rose or fell because of a change in the price! Shifts in the Demand Curve • Two ways a Demand Curve can shift: 1. Increase in Demand – Means a rightward shift of the demand curve – At any given price, consumers demand a larger quantity of the good or service than before Shifts in the Demand Curve 2. Decrease in Demand – Means a leftward shift of the demand curve – At any given price, consumers demand a small quantity of the good or service than before Five Factors that Shift the Demand Curve 1. Changes in consumer tastes 2. Changes in the number of buyers 3. Changes in consumer incomes 4. Changes in the price of complementary and substitute goods 5. Change in consumer expectations 1. Changes in Consumer Tastes • When tastes change in favor of a good, more people want to buy it at any given price – Demand curve shifts to the right • If tastes change against a good, fewer people want to buy it at any price – Demand curve shifts to the left Market Demand Curve shows the combined quantity demanded by all consumers depends on the market price of that good **When it is said, demand curve, it means the Market Demand Curve ** Individual Demand Curves 2. Changes in the numbers of buyers • – Shows the relationship between quantity demanded and price for an individual consumer 3. Changes in Consumer Incomes • If a family’s income rises, they are more likely to go on a trip to Walt Disney World and would then have to buy airline tickets and get a hotel room. • So, a rise in consumer incomes will cause the demand curves for most goods to shift to the right. 3. Changes in Consumer Incomes • “most goods” verse “all goods” • Most goods are normal goods – demand for these goods increases when consumers incomes rise. • When demand decreases for a good, these are referred to as inferior goods – a good that is considered less desirable than more expensive alternatives • When incomes go up, people stop buying an inferior good and switch to the preferred good. – This shifts the demand curve to the left – If a fall income occurs, the demand curve shifts to the rights 4. Change in the prices of complementary and substitute goods • Tea is a substitute for coffee • Cars and gasoline are complements 5. Changes in consumer expectations • Current demand for a good is often affected by expectations of its future price • Ex. Seasonal sales – buying holiday gifts for Christmas in 2011 the day after Christmas this year in 2010. • If you expect your income to rise, you will buy today and increase demand for certain goods • If you expect your income to fall, you are likely to save and reduce your demand for certain goods Review Question: • Explain whether each of the following events represent A. A shift of the demand curve B. A movement along the demand curve A. a shift of the demand curve B. a movement along the demand curve 1. A store owner finds that customers are willing to pay more for umbrellas on rainy days. 2. When XYZ Telecom, a long-distance telephone service provider, offered reduced rates on weekends, its volume of weekend calling increased sharply. 3. 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. 4. The sharp rise in the price of gasoline leans many commuters to join carpools in order to reduce their gasoline purchases. Demand Curves Notes Supply and Demand is a way to show a model of a Competitive Market • Competitive Market is a • The key feature of a competitive market is that no individual’s actions have a noticeable effect on the price at which the good or service is sold. • Supply and Demand models show the behavior of a competitive market • The five elements of the model are: – The demand curve – The supply curve – The set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift – The market equilibrium – The way the market equilibrium changes when the supply curve or demand curve shifts The Demand Curve • The demand schedule is a table that shows how much of a good or service consumers will want to buy at different prices • As price rises, quantity demanded falls The Law of Demand Shift of the Demand Curve • A shift of the demand curve is a change in the quantity demanded at any given price, representing by the change of the original demand curve to a new position, denoted by a new demand curve. Shifting of the Demand Curve Movement Along the Demand Curve • This is a change in the quantity demanded of a good that is the result of a change in that good’s price. Movement Along the Demand Curve Movement Along the Demand Curve • Remember: – “the demand for X has increased” or “the demand for Y decreased” it means that the demand curve for X or Y shifted – NOT…… that the quantity demanded rose or fell because of a change in the price! Shifts in the Demand Curve • Two ways a Demand Curve can shift: 1. Increase in Demand Shifts in the Demand Curve 2. Decrease in Demand Five Factors that Shift the Demand Curve 1. Changes in _________________ 2. Changes in __________________ 3. Changes in _________________ 4. Changes in ___________________ _____________________________ 5. Change in ____________________ 1. Changes in Consumer Tastes • When tastes change in favor of a good, more people want to buy it at any given price • If tastes change against a good, fewer people want to buy it at any price 2. Changes in the numbers of buyers • Individual Demand Curves – Shows the relationship between quantity demanded and price for an individual consumer 3. Changes in Consumer Incomes • If a family’s income rises, they are more likely to go on a trip to Walt Disney World and would then have to buy airline tickets and get a hotel room. • So, a rise in consumer incomes will cause the demand curves for most goods to shift to the right. 3. Changes in Consumer Incomes • “most goods” verse “all goods” • Most goods are normal goods – • When demand decreases for a good, these are referred to as inferior goods – • When incomes go up, people stop buying an inferior good and switch to the preferred good. 4. Change in the prices of complementary and substitute goods • Tea is a substitute for coffee • Cars and gasoline are complements 5. Changes in consumer expectations • Current demand for a good is often affected by expectations of its future price • If you expect your income to rise, you will buy today and increase demand for certain goods • If you expect your income to fall, you are likely to save and reduce your demand for certain goods Review Question: • Explain whether each of the following events represent A. A shift of the demand curve A. A movement along the demand curve A. a shift of the demand curve B. a movement along the demand curve 1. A store owner finds that customers are willing to pay more for umbrellas on rainy days. 2. When XYZ Telecom, a long-distance telephone service provider, offered reduced rates on weekends, its volume of weekend calling increased sharply. 3. 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. 4. The sharp rise in the price of gasoline leans many commuters to join carpools in order to reduce their gasoline purchases.