Download Demand

Lecture 6 : Examining
Market Mechanics




Money prices and relative real prices
Influences on demand
Influences on supply
Prices and quantities determined by
demand and supply
 Why prices change
 Work for the Week
– Chapter 4 in both book and EIA
ECON
111
HOFFMAN
MACRO HAPPENS
Opportunity Cost and Price
 Economic actions arise from
scarcity, wants in excess of available
resources.
 Scarcity implies choices.
 Choices are influenced by
opportunity costs through
substitution.
ECON
111
HOFFMAN
MACRO HAPPENS
Opportunity Cost and
Relative Price
 The ratio of one price to another is
called a relative price.
 A relative price is an opportunity
cost.
 We often measure prices relative to a
price index, the average price of a
basket of goods.
ECON
111
HOFFMAN
MACRO HAPPENS
Demand, Supply and
Relative Prices
 Demand and supply determine relative prices.
 The word “price” means relative price.
 If we predict a price will fall, we mean its price will
fall relative to the average price of other goods
and services.
 All movements in price in the market analysis
that we examine refers to relative price
movements.
 Relative Price is not “Money” Price.
ECON
111
HOFFMAN
MACRO HAPPENS
The Price of Wheat
ECON
111
HOFFMAN
MACRO HAPPENS
Demand
 If a person demands something, they
– Want it,
– Can afford it, and
– Have made a definite plan to buy it.
 Wants are the unlimited desires or
wishes that people have for goods
and services.
ECON
111
HOFFMAN
MACRO HAPPENS
Demand
 The quantity demanded of a good or
service is the amount that
consumers plan to buy during a
given time period at a particular
price.
ECON
111
HOFFMAN
MACRO HAPPENS
Demand
 What determines buying plans?
–
–
–
–
–
–
The price of the good
The prices of related goods
Income
Population
Preferences
Expected future prices
ECON
111
HOFFMAN
MACRO HAPPENS
Demand
 The Law of Demand
–
Other things remaining the same, the higher the
price of a good, the smaller is the quantity
demanded.
 Reasons for the Law of Demand
–
–
Substitution Effect
Income Effect
ECON
111
HOFFMAN
MACRO HAPPENS
Demand
 Demand Curve and Demand
Schedule
–
Demand curves show the relationship between
the quantity demanded of a good and its price
(ceteris paribus).
–
Demand schedules list the quantities demanded
at each different price (ceteris paribus).
ECON
111
HOFFMAN
MACRO HAPPENS
Demand
Price
Quantity
(dollars per tape)
(millions of tapes per week)
a
b
1
2
9
6
c
3
4
d
4
3
e
5
2
ECON
111
HOFFMAN
MACRO HAPPENS
Price (dollar per tape)
Demand
6
5
ECON
111
4
HOFFMAN
3
MACRO HAPPENS
2
1
0
2
4
6
8
10
Quantity (millions of tapes per week)
Price (dollar per tape)
Demand
6
e
5
d
4
HOFFMAN
c
3
MACRO HAPPENS
b
2
a
1
0
ECON
111
2
4
6
8
10
Quantity (millions of tapes per week)
Price (dollar per tape)
Demand
6
e
5
HOFFMAN
d
4
MACRO HAPPENS
c
3
b
2
a
1
0
ECON
111
2
Demand
for tapes
4
6
8
10
Quantity (millions of tapes per week)
Demand
 A Change in Demand
–
ECON
111
HOFFMAN
MACRO HAPPENS
When any factor that influences buying plans
other than the price of the good changes, there
is a change in demand.
•
•
An increase in demand causes the demand curve to
shift rightward.
A decrease in demand causes the demand curve to
shift leftward.
ECON
111
HOFFMAN
MACRO HAPPENS
A Change in Demand
 Price of Related Goods
–
–
Substitutes - goods used in the place of another
good
Complements - goods used in conjunction with
another good
What Happens to Demand if the price
of a substitute good increases? A
complement?
A Change in Demand
 Income
–
–
Normal Goods — demand increases as income
increases
Inferior Goods — demand decreases as income
increases
ECON
111
HOFFMAN
MACRO HAPPENS
A Change in Demand
 Population
–
Size and age structure
 Preferences
–
Attitudes toward goods and services
 Expected Future Prices
ECON
111
HOFFMAN
MACRO HAPPENS
ECON
111
HOFFMAN
MACRO HAPPENS
Demand
Original demand schedule
schedule
Walkman $200
New demand
Walkman $50
Price Quantity
Quantity
Price
(dollars
(millions of tapes
(millions of tapes
per tape)
per week)
week))
(dollars
a
1
9
b
2
6
c
3
4
d
4
3
per tape)
per
Assume the original price of
Walkmans is $200. The
demand schedule shows
the Price-Quantity
relationship for tapes.
Demand
Original demand schedule
schedule
New demand
Walkman $200
Walkman $50
Price Quantity
Quantity
Price
(dollars
(millions of tapes
(millions of tapes
per tape)
per week)
week))
(dollars
per tape)
a
1
9
a'
1
b
2
6
b'
2
c
d
3
4
4
3
c'
d'
3
4
per
ECON
111
HOFFMAN
MACRO HAPPENS
ECON
111
HOFFMAN
MACRO HAPPENS
Demand
Original demand schedule
schedule
New demand
Walkman $200
Walkman $50
Price Quantity
Quantity
Price
(dollars
(millions of tapes
(millions of tapes
per tape)
per week)
week))
(dollars
per tape)
per
a
1
9
a'
1
13
b
2
6
b'
2
10
c
3
4
c'
3
8
d
4
3
d'
4
7
ECON
111
Price (dollar per tape)
HOFFMAN
Demand
6
5
4
e
d
3
c
2
1
0
b
Demand for tapes
(Walkman $200)
2
4
a
6 8 10 12 14
Quantity (millions of tapes per week)
MACRO HAPPEN
ECON
111
Price (dollar per tape)
HOFFMAN
Demand
6
5
4
e
e'
d
3
d'
c
c'
2
1
0
Demand for tapes
(Walkman $50)
b
Demand for tapes
(Walkman $200)
2
4
b'
a
a'
6 8 10 12 14
Quantity (millions of tapes per week)
MACRO HAPPENS
The Demand for Tapes
 The Law of Demand
–
The quantity of tapes demanded
•
Decreases if:
– The price of a tape rises
•
Increases if:
– The price of a tape falls
ECON
111
HOFFMAN
MACRO HAPPENS
The Demand for Tapes
 Changes In Demand
–
The demand for tapes
•
Decreases if:
– The price of a substitute falls
–
The price of a complement rises
–
Income falls (a tape is a normal good)
–
The population decreases
–
The price of a tape is expected to fall in the
future
ECON
111
HOFFMAN
MACRO HAPPENS
The Demand for Tapes
 Changes In Demand
–
The demand for tapes
•
Increases if:
– The price of a substitute rises
–
The price of a complement falls
–
Income rises (a tape is a normal good)
–
The population increases
–
The price of a tape is expected to rise in the
future
ECON
111
HOFFMAN
MACRO HAPPENS
A Change in the Quantity Demanded
Versus a Change in Demand
 A movement along a demand curve,
which results from a change in price,
shows a change in the quantity
demanded.
 If some other influence on buyers’
plans changes, holding price
constant, there is a change in
ECON
demand.
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity
Demanded Versus a Change in
Demand
D0
Quantity
ECON
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity
Demanded Versus a Change in
Demand
Decrease in
quantity
demanded
Increase in
quantity
demanded
D0
Quantity
ECON
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity
Demanded Versus a Change in
Demand
P0
D0
Q0
Quantity
ECON
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity Demanded
Versus a Change in Demand
P1
P0
D0
Q1 Q0
Quantity
ECON
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity
Demanded Versus a Change in
Demand
P1
P0
P2
D0
Q1 Q0
Q2 Quantity
ECON
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity Demanded
Versus a Change in Demand
D0
Quantity
ECON
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity Demanded
Versus a Change in Demand
Increase in
demand
D0
Quantity
D1
ECON
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity Demanded Versus
a Change in Demand
Decrease in
Increase in
demand
demand
D2
D0
Quantity
D1
ECON
111
HOFFMAN
MACRO HAPPENS
Price
A Change in the Quantity Demanded
Versus a Change in Demand
Decrease in
quantity
demanded
Decrease in
Increase in
demand
Increase in
quantity
demanded
demand
D2
D0
D1
ECON
111
HOFFMAN
Quantity
MACRO HAPPENS
Movement Along Versus a
Shift of the Demand Curve
 If the price of a good changes but
everything else remains the same, there is
a movement along the demand curve.
 If the price of a good remains constant but
some other influence on buyers’ plans
changes, there is a shift of the demand
curve.
ECON
111
HOFFMAN
MACRO HAPPENS
A Change in Quantity
Demanded Versus a Change
in Demand
 A movement along the demand curve
shows a change in the quantity
demanded.
 A shift of the demand curve shows a
change in demand.
ECON
111
HOFFMAN
MACRO HAPPENS