Download Our Basic Economic Objectives & How We Measure Them

Chapter 2:
Demand & Supply
Agenda (Game Plan)
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Markets & Circular Flow Diagram
What is demand?
The law of demand
The demand curve
Determinants of demand
Change in demand vs. change in quantity demanded
The law of diminishing marginal utility
Elasticity of Demand
What is a Market?
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Any network that brings buyers and sellers
together so they can exchange goods and services
Doesn’t have to be a physical place, but can be
done over the internet, phone or fax
Exists wherever supply and demand determine the
price and quantity of goods and services sold
Some markets are Global (Oil) others are local
(Hot dogs)
The Circular Flow Diagram
Demonstrates how households & businesses
interact
 Households are buyers (concept of demand)
 Businesses are sellers (concept of supply)
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Circular Flow Between Businesses and
Households
Consumer
Goods & Services
Money
(consumer
spending)
Business
Households
Money
(household income)
Economic Resources
(land, labour, Capital & entrepreneurial skills)
Demand: The Consumer Side
Is the quantities of a good or service that
buyers are willing and able to purchase at
various prices
 Demand schedule shows the various prices and
quantity demanded at each price
 Economists consistently will gather data and
put it into a schedule
 Then to make it visually easier to understand,
put the schedule into graph form
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The Law of Demand
Law of Demand: An increase in price will
cause a decrease in quantity demanded
(and vice versa)
 A decrease in price will cause an increase in
quantity demanded
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The Demand Curve
P$
D
0
Q
Quantity
The Law of Demand
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There is an indirect relationship between
price (P) and quantity demanded (Qd)
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P
Qd
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P
Qd
Change In Demand (D) vs. Change
in Quantity Demanded (Qd)
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A change in quantity demanded (QD) occurs when
there is a change in price (Ceteris Paribus)
This is represented by a move along the demand
curve.
A change in demand (D) occurs when there is a
change in a demand determinant
This is represented by a shift of the demand curve
Effect of an Increase in Demand
P$
D
D1
0
Q
Quantity
Effect of a Decrease in Demand
P$
D
D0
0
Q
Quantity
Determinants of Demand
1.
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Number of buyers 
More buyers = more demand &
fewer buyers = less demand
Income effect 
For normal products increased income =
increased demand,
For inferior products (e.g. canned meat)
increased income = decreased demand
Prices of Substitute Products 
A price increase (decrease) in one product
causes an increase (decrease) in the demand for
its substitute
Eg: Butter/Margarine
Determinants of Demand
4.
Prices of Complementary Products
A price increase (decrease) in one product
causes a decrease (increase) in the demand for
its substitute
Eg: Cars and gas, DVD players & DVD’s
5.
6.
Consumer Preferences A change in consumers tastes
and preferences also affects demand. Eg. Nutrition,
fashion, safety.
Consumer Expectations  Expectation of future price
changes will alter current demand (e.g. gas price
increases the immediate future will cause consumer to
fill their tanks earlier)
Law of Diminishing Marginal
Utility
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Law of Diminishing Marginal Utility  satisfaction diminishes with
increased consumption. Therefore must decrease price to increase
consumption
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Each additional unit of a good or service that is consumed brings less
satisfaction or “utils” than the previous unit consumed
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This helps explain why the demand curve is downward sloping
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Measurement in utils of human satisfaction when consuming products
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Consume up to and including the point where your satisfaction level is
equal between two products MU / P1 = MU / P2
Elasticity of Demand
Shows the responsiveness of the quantity
demanded to a change in price
 P x Qd = TR (total revenue)
 Elastic Demand
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P < Qd
 Inelastic Demand
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P >
Qd
 Unitary Demand
P
= Qd
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Factors Affecting Price Elasticity
of Demand
Portion of
Consumer
Incomes
Access to
Substitutes
Necessities vs.
Luxuries
Time
FACTORS AFFECTING
ELASTICITY OF DEMAND
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Portion of Consumer Incomes
Products taking up larger portions of income are more
responsive (elastic) to price changes (stereo, rent)
Smaller purchases tend to be more inelastic (bread,
milk, salt)
Access to Substitutes
The demand for products with close substitutes will be
more elastic (e.g. margarine and butter)
FACTORS AFFECTING
ELASTICITY OF DEMAND
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Necessities vs. Luxuries
Consumers usually purchase similar quantities of
basic necessities (such as milk, eggs, bread etc)
regardless of price. Therefore, demand is inelastic.
Luxury items (such as vacations, jewelry, boats) tend
to be elastic.
Time
Demand tends to be more elastic over time.
Eg. Petroleum, natural gas, electricity
Applications
Homework P. 68-69 #1-7
 Determinant of Demand Exercise (blue
sheet)
 Article & Questions: Electronic Gadgets
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