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INDIVIDUAL MARKETS
Demand
MARKETS
• A market is an institution or mechanism that brings
together buyers and sellers of goods, services, or
resources for the purpose of exchange.
• www.tse.com and www.nyse.com are key markets
to exchange investment securities.
• In this chapter we will focus on large markets
consisting of many buyers and sellers of
standardized products for which there is
competition.
DEMAND: THE NATURE OF WANTS
• Demand is a schedule or a curve that shows the
various amounts of a product that consumers
are willing and able to purchase at each of a
series of possible prices during a set time.
• We say ABLE and WILLING because even
though you might be willing to buy a good, it
does not effect the market unless you have the
resources to obtain it.
A MARKET DEMAND SCHEDULE
• On the right is a demand
schedule for soda. For each
price, there is a certain
“quantity demanded.”
• Should the price reach this
level, the associated
quantities would be
demanded: people would be
Able and Willing to buy it.
• Clearly, as the price declines,
consumers are able and
willing to buy more soda.
THE LAW OF DEMAND
• The principle that, other things being equal, an
increase in a product’s price will reduce the quantity
of it that is demanded; and conversely for a
decrease In price.
• There is an inverse relationship between price and
quantity demanded.
• It is important that other things remain equal as a
price increase in Coca-Cola may not result in a
decline in quantity demanded if Pepsi ALSO rises in
price.
WHY IS THERE AN INVERSE RELATIONSHIP?
• Diminishing Marginal Utility: You derive less satisfaction
from each successive unit of a good or service consumed.
The price has to be reduced for you to keep consuming at a
given time.
• The Income Effect: A change in the price of a product
changes a consumer’s real income (purchasing power) and
thus the quantity of the product purchased. In other words,
you are richer if a price drops and vice versa.
• The Substitution Effect: Things become a better or worse
“deal.” When the price of one good goes up or down, you
consider buying substitutes, and thus demand more or less.
A DEMAND CURVE
• Illustrates the inverse
relationship between the
quantity demanded of a
good or service and its
price, other things being
equal.
• The downward slope
represents the Law of
Demand – a higher
quantity is demanded if
the price falls.
CONSTRUCTING MARKET DEMAND
• We simply have to add up the
quantities demanded for each
good or service at each price
by all individuals.
• The diagram to the right
illustrates this exercise for a
market with ten people.
• A demand curve would be a
curve illustrating these points,
with quantity demanded on
the x axis and price on the y
axis.
THE DETERMINANTS OF DEMAND
• In constructing a demand curve, we assume that factors
besides price are held constant (“other things being
equal”). However, other things do influence demand.
• The basic determinants of demand are:
1. Consumer Tastes or Preferences
2. The Number of Consumers in the Market
3. Consumer Incomes
4. The Prices of Related Goods
5. Consumer Expectations about Future Prices and Incomes
CHANGE IN “DEMAND”
VERSUS
CHANGE IN “QUANTITY DEMANDED”
• When the price changes, you saw that we moved
along the demand curve, which indicates a
corresponding change in the Quantity Demanded.
• When there is a change in one of the Determinants
of Demand, the curve actually shifts! This is what
we mean by a change in Demand.
• When there is a change in Demand, consumers
actually change their desired quantities at ALL
prices. The whole schedule changes.
A CHANGE IN QUANTITY DEMANDED
•
A “movement” denotes a change in
both price and quantity demanded
from one point to another on the
curve.
•
The movement implies that the
demand relationship remains
consistent.
•
Therefore, a movement along the
demand curve will occur when the
price of the good changes and the
quantity demanded changes in
accordance to the original demand
relationship. It is caused ONLY by a
change in price.
A CHANGE IN DEMAND
• A shift in demand occurs when a
good's quantity demanded
changes even though price
remains the same!
• Shifts in the demand curve imply
that the original demand
relationship has changed,
meaning that quantity demanded
is affected by a factor other
than price.
• The factors other than price are
the Determinants of Demand.
THE DETERMINANTS OF DEMAND CONTINUED…
1. Tastes and Preferences:
• A favourable change in tastes for a
product means more of it will be desired
at each price (the curve shifts right).
• Styles and fads are related to changes in
tastes, as are rises in health concerns.
• Advertising influences consumer tastes
and preferences. The presence of a welldeveloped brand shifts the demand curve
for a good to the right.
2. THE NUMBERS OF BUYERS
• Population increases create more consumers, who
demand higher quantities of goods at each price.
• A rise in the birth-rate or number of babies would
increase the demand for baby toys, and shift the curve
to the left.
3. CONSUMER INCOMES
• For most goods, increases in income increases
demand… but it is not always that clear.
• For Normal Goods – demand has a positive
relationship with incomes. Higher incomes would mean
people demand more new clothing.
• For Inferior Goods – demand has a negative
relationship with incomes. Higher incomes mean less is
demanded. Demand for used clothing would decline.
4. PRICES OF RELATED GOODS
• Substitutes: Products or services that can be used in place of
each other. They do not have to be identical. An increase in taxicab prices increases demand for bus passes.
• Complements: Products and services that are used together. A
decline in the price of I-Pods increases demand for I-Pod
headphones.
• Unrelated Goods: Independent goods are not related to each
other, and the consumer does not compare them. Golf balls and
turnips for example do not influence each other.
5. CONSUMER EXPECTATIONS ABOUT FUTURE
PRICES AND INCOMES
• Higher expectations of future prices may cause demand to
increase now, and vice versa. People like to beat anticipated
price rises, or wait for prices to go down.
• Changes in expectations about future availability may increase
demand. If you expect a shortage, you buy more now.
• Changes in expectations about future income may increase or
reduce demand. If you expect a raise, you might demand more
now. If you expect a lay-off, you might save.
ASSIGNMENT QUESTIONS
• Complete Numbers 1, 2 and 3. Page 71.