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ECONOMICS 200 PRINCIPLES OF MICROECONOMICS Professor Lucia F. Dunn Department of Economics 1 THREE WAYS TO REPRESENT DEMAND • 1. A SCHEDULE • 2. A GRAPH • 3. AN EQUATION OR FUNCTION 2 Demand Schedule Let’s consider the demand schedule for beer at OSU. P ($ per pack) $ 50 1. 00 2. 50 2. 00 3. 50 3. QD (per month) 180* 150 115 70 50 * Units of thousands of six-packs. Please note that these do not represent actual combinations of prices and quantities bought, but only consumer assessments of what they would do when confronted with different prices per beer. 3 Demand Curve Now, the information in the table of the beer demand schedule translates directly into a demand curve. 4.00 3.50 Demand Curve P ($/pack) 3.00 2.50 2.00 1.50 1.00 0.50 0.00 0 50 100 150 200 Q (packs) 4 Demand Equation • Q = f (P) • Q is the “dependent variable” • P is the “independent variable” • Supply and Demand Curves are plotted “backwards”. 5 Change in Quantity Demanded If we have a change in the price of the beer, whose demand we are examining, we will just get a movement along the single fixed demand. p p2 p1 D Q2 Q1 QBeer We call this change a change in quantity demanded. 6 Shift in Demand Curve Any particular quantity figure that we read off this curve would be called a quantity demanded of beer. The entire curve is referred to simply as demand. Demand is usually considered a function of its own price, ceteris paribus. (Latin for “other things equal” or “other things constant”.) Actually, QD f ( p, x, y, z , ) If one of the other variables changes, the way we would represent this on a 2-dimensional graph would be by “shift” of the entire demand curve. 7 Shift in Demand Curve (1) Look at the demand curve for beer when there is a rise in price of wine. We would expect to see the entire demand curve for beer shift to the right. p p D2 D1 Q1 Q2 QBeer This means that at any price, people would now be demanding more beer: Q1 Q2 8 Shift in Demand Curve (2) If a depression like we had in 1930’s should suddenly set in, so that there was a 25% drop in the average income in the country, then we would expect the demand for beer and a lot of other things to move to the left as long as they are normal commodities. p p D2 Q2 Q1 D1 QD Now, with people poorer, at every price the demand for commodities should be lower. 9 Distinction between: Change in Quantity Demanded & Change in Quantity • Change in quantity demanded is a movement along a single demand curve -results from a change in price. Change in demand is a shift of the entire demand curve - results from a change in a ceteris paribus factor. 10 Change in Demand Ceteris Paribus Factors 1. Average Household Income 2. Prices of Related Products (a) Substitutes (b) Complements 3. Tastes + Preferences 4. Distribution of Income 5. Population 6. Expectation about the Future 11 Shift in Demand Curve (1) Factor 1: Change in Average Household Income e.g. If a depression like we had in 1930’s should suddenly set in, so that there was a 25% drop in the average income in the country, then we would expect the demand for beer and a lot of other things to move to the left as long as they are normal commodities. p p D2 Q2 Q1 D1 QD Now, with people poorer, at every price the demand for commodities should be lower. 12 Change in Average Household Income (ct’d) Two Possibilities Possibility 1: Normal Commodities When income goes up, demand increases and vice versa. Possibility 2: Inferior Commodities When income goes up, demand decreases and vice versa. e.g. Hamburger Helper 13 Shift in Demand Curve (2) Factor 2: Change in the Price of Related Commodities A. Substitutes: Consumed instead of one another Example: Wine and Beer Price of wine increases => Demand for beer increases p p D2 D1 Q1 Q2 QBeer This means that at any price, people would now be demanding more beer: Q1 Q2 14 Change in the Price of Related Commodities (ct’d) B. Complements: Consumed together Example: Coffee and sugar Price of sugar increases => Demand for coffee decreases p p D1 D2 Q2 Q1 Qcoffee 15 Change in Demand Ceteris Paribus Factors 1. Average Household Income 2. Prices of Related Products (a) Substitutes (b) Complements 3. Tastes + Preferences 4. Distribution of Income 5. Population 6. Expectation about the Future 16 17