Download Ch. 2.1 Demand

Chapter 2
Demand
p36-41
DEMAND
• The relationship between demand and
price
– the law of demand
DEMAND
• The demand curve
• First we need some data on demand at
different prices
The demand curve:
The demand for potatoes (monthly)
A
B
C
D
E
(1)
Price
(pence
per kg)
(2)
Tracey's
demand
(kg)
(3)
Darren's
demand
(kg)
(4)
Market
demand
(kg)
4
8
12
16
20
28
15
5
1
0
16
11
9
7
6
44
26
14
8
6
Total Market Demand Cureve for an
Economy
• Total Market Demand
• = Add up all the individual demands
•
•
•
•
Usually specify time
Total demand per year
Or Month
Or Week etc
The demand curve:
The demand for potatoes (monthly)
(1)
Price
(pence per
kg)
(4)
Total market
demand
(tonnes: 000s)
A
4
700
B
8
500
C
12
350
D
16
200
E
20
100
Market demand for potatoes (monthly)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
20
Price (pence per kg)
A
4
700
16
12
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
Price (pence per kg)
20
16
A
4
700
B
8
500
12
B
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
Price (pence per kg)
20
16
A
4
700
B
C
8
12
500
350
C
12
B
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
Price (pence per kg)
20
D
16
C
12
A
4
700
B
C
D
8
12
16
500
350
200
B
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
20
Price (pence per kg)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
EE
D
16
C
12
A
4
700
B
C
D
E
8
12
16
20
500
350
200
100
B
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
20
Price (pence per kg)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
E
D
16
C
12
A
4
700
B
C
D
E
8
12
16
20
500
350
200
100
B
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
E
Price (pence per kg)
20
Note when price rises,
quantity demanded falls
D
16
That is, move from A to E
C
12
B
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
E
Price (pence per kg)
20
LAW of DEMAND
D
16
Quantity demanded falls
when price rises,
ceteris paribus.
C
12
B
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
E
Price (pence per kg)
20
Demand curve
slopes down,
Ceteris paribus
D
16
C
12
B
8
A
4
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Law of Demand
• Price is one of the most important
determinants of demand
• Sometimes we write:
• QD =f(P)
• Or simply
• Quantity is a function of Price
Law of Demand
• Price is one of the most important
determinants of demand and
•
•
•
•
Quantity demanded falls as price rises
OR
Quantity demanded rises as price falls
………….. Ceteris paribus
• i.e. Quantity and price are negatively
related
• So Quantity is a negative function of price
Market demand for potatoes (monthly)
Negative means
Change in Q is positive
When change in P is negative
Price (pence per kg)
20
16
Means same thing as
Demand curve
slopes down
12
8
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
Negative means
Change in Q is positive
When change in P is negative
Price (pence per kg)
20
16
Means same thing as
Demand curve
slopes down
12
8
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market demand for potatoes (monthly)
Negative means
Change in Q is positive
When change in P is negative
Price (pence per kg)
20
16
Means same thing as
Demand curve
slopes down
12
8
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
DEMAND
• So what does Ceteris Paribus mean,
• ‘all other things held constant’
• So what are we holding constant?
• Suggestions Please:
• number and price of other goods
– income
– distribution of income
– tastes
– expectations
DEMAND
• So P is important, but also other
determinants of demand such as
– number and price of substitute goods
– number and price of complementary
goods
– income
– distribution of income
– tastes
– expectations
How do these other things affect the demand curve?
Lets look at the
effect of a Substitute
Price
P
D0
O
Q0
Quantity
How do these other things affect the demand curve?
Suppose the price of
Rice were to rise,
what would happen
to the demand for
Potatoes?
Price
P
D0
O
Q0
Quantity
An increase in the price of a substitute
At P0 the quantity
demanded would
rise from Q0 to
Q1
Price
P0
D0
O
Q0
Q1
Quantity
An increase in the price of a substitute
The same thing
would happen at
all other prices
P
Price
…the demand for
potatoes rise,
when the price of
rice rises.
D0
O
Q0
Quantity
An increase in the price of a substitute
So Demand
would rise at
every price level.
P
Price
And the demand
curve moves out
D0
O
Q0
Quantity
D1
An increase in the price of
a substitute
..Causes the
demand curve
to SHIFT OUT
Price
P
D0
O
Q0
Quantity
D1
Demand
• What about a Complementary Good?
• Bangers and Mash
• Bangers Complement the Potatoes
• So what will happen if the price of Bangers
were to rise?
An increase in the price of a Complement
What happens when
price of Bangers Rise?
P
Price
Demand for Potatoes fall
.. And the
demand curve
for Potatoes
shifts in
D0
O
Q0
Quantity
An increase in the price of a
Complement
…Causes the demand
curve to SHIFT IN
Price
P
D0
O
Q0
Quantity
• Why are we emphasising the word SHIFT
• We said before that output was a function
of price.
• Q=f(P)
• And when we drew the diagram we plotted
the quantity purchased at each price
A Demand Curve
Price
P
D0
O
Q0
Q1
Quantity
• But of course we have already noted that
other things effect demand,
• Q=f(P, ………..)
• eg, price of rice PR
• And price of Bangers PB
• So should write our equation as
• Q=f(P, PR,PB,……..)
A Demand Curve
•So when we change the
price of the good P
•Q=f(P, PR,PB,……..)
•We move along the
curve
Price
P
D0
O
Q0
Q1
Quantity
•But when we change the price of other goods, we
SHIFT the curve
•E.g. change price PR,
•a substitute
•Q=f(P, PR,PB,……..)
•the SHIFTS curve out
Price
P
D0
O
Q0
D1
•Or if we change the
price of a complement,
PB
•Q=f(P, PR,PB,……..)
•We SHIFT the curve in
Price
P
D0
O
Q0
Quantity
• So when we change the price of the good P
• Q=f(P, PR,PB,……..)
• We Move ALONG Curve
• When we change any other variable
• Q=f(P, PR,PB, …….. )
• We SHIFT the curve
DEMAND
• Other determinants of demand
– number and price of substitute goods
– number and price of complementary goods
– income
– distribution of income
– tastes
– expectations
• Have not yet discussed effect of changes in
Income
Effects of changes in Income on Demand
• Q=f(P, PR,PB, I, ……..)
• I = Income
• What would your expect?
• For most goods (Normal Goods) demand
increases as Income increase
• But for some goods (Inferior Goods)
demand falls as income increases
– E.g. potatoes, rice
An increase in Income
For a Normal
Good Demand
Shifts Out
Price
P
D0
O
Q0
Quantity
D1
An increase in Income
For an INFERIOR good
demand SHIFT IN
Price
P
D0
O
Q0
Quantity
DEMAND
• In this module you learnt about:
• The relationship between demand and
price
– the law of demand
– The effect of changes in other variables
– Movements along versus shifts in the demand
curve
DEMAND
• Demand functions: Some Mathematical
Examples. Page 39-41 of the textbook
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
30
20
10
D
0
0
2
4
6
Q (000s)
8
10
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
P
Qd (000s)
5
9
30
20
10
D
0
0
2
4
6
Q (000s)
8
10
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
P
Qd (000s)
5
10
9
8
30
20
10
D
0
0
2
4
6
Q (000s)
8
10
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
P
Qd (000s)
5
10
15
9
8
7
30
20
10
D
0
0
2
4
6
Q (000s)
8
10
Demand curve for equation: Qd = 10 000 – 200P
50
40
P
30
P
Qd (000s)
5
10
15
20
9
8
7
6
20
10
D
0
0
2
4
6
Q (000s)
8
10