Lesson 3 Demand Theory
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Transcript of Lesson 3 Demand Theory
Demand TheoryDemand Theory
September 25, 2006September 25, 2006
Short QuizShort Quiz
QuestionsQuestions What is Economics? Why study economics? (10pts)What is Economics? Why study economics? (10pts)
Enumerate at least 3 Basic Economic Questions? (10pts)Enumerate at least 3 Basic Economic Questions? (10pts)
What is Opportunity Cost? Give an example using a PPF What is Opportunity Cost? Give an example using a PPF curve. Describe what happens if the technology/resource curve. Describe what happens if the technology/resource increases for (a) 1 good and (b)both goods. (20pts)increases for (a) 1 good and (b)both goods. (20pts)
Enumerate and give 1 example to the 4 Economic systems? Enumerate and give 1 example to the 4 Economic systems? Explain the example. (20pts)Explain the example. (20pts)
Give 1 economic function of the Government and give an Give 1 economic function of the Government and give an example. (20Pts)example. (20Pts)
Bonus: Draw the circular flow (20PTs)Bonus: Draw the circular flow (20PTs)
OutlineOutlineBasics of Demand TheoryBasics of Demand Theory
Demand definedDemand definedDemand Schedule and Demand CurveDemand Schedule and Demand CurveIndividual Demand and Market DemandIndividual Demand and Market DemandLaw of DemandLaw of DemandChange in quantity demanded vs. change in Change in quantity demanded vs. change in demand-demand-Non-Price determinants of DemandNon-Price determinants of Demand
What is Demand?What is Demand?
It is the plan, or relationship, expressing It is the plan, or relationship, expressing different amounts of a product buyers are different amounts of a product buyers are willing and able to buy at possible prices, willing and able to buy at possible prices, assuming all other non-price factors assuming all other non-price factors remain the same. remain the same.
Also known as Quantity DemandedAlso known as Quantity Demanded
Demand ScheduleDemand Schedule
Shows the quantities of a product that a Shows the quantities of a product that a household would be willing to buy at household would be willing to buy at different pricesdifferent prices
Example of Raw DataExample of Raw Data
Maximum pricewilling to pay
Mary 1 4Bob 1 1Jane 1 5Ed 1 3
Alice 1 2
Name QuantityMaximum pricewilling to pay
Mary 1 4Bob 1 1Jane 1 5Ed 1 3
Alice 1 2
Name Quantity
Demand ScheduleDemand Schedule
Total QuantityDemanded
5 1 14 1 23 1 32 1 41 1 5
Price QuantityTotal Quantity
Demanded5 1 14 1 23 1 32 1 41 1 5
Price Quantity
The Demand CurveThe Demand Curve The demand curve shows how much of a The demand curve shows how much of a
good consumers are willing to buy as the good consumers are willing to buy as the price per unit changes holding non-price price per unit changes holding non-price factors constant.factors constant.
The Demand CurveThe Demand Curve
Quantity
Horizontal axis measures quantity (Q) demanded innumber of units per time period
Vertical axis measures price (P) paidper unit in dollars
Price($ per unit)
The Demand CurveThe Demand Curve
D
The demand curve slopesdownward demonstrating that consumers are willing
to buy more at a lower priceas the product becomes
relatively cheaper and the consumer’s real income
increases.
Quantity
Price($ per unit)
They intersect the quantity (X) axis, a result of time limitations and
diminishing marginal utility.
They intersect the quantity (Y) axis, a
result of time limited
incomes and wealth.
Total QuantityDemanded
5 1 14 1 23 1 32 1 41 1 5
Price QuantityTotal Quantity
Demanded5 1 14 1 23 1 32 1 41 1 5
Price Quantity
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Quantity demanded
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ceExample:Example:
Law of Supply and DemandLaw of Supply and Demand
Term was first used Term was first used When Price rises, quantity demand fallsWhen Price rises, quantity demand falls When Price falls, quantity demand risesWhen Price falls, quantity demand rises
““There is thus a negative, or inverse, There is thus a negative, or inverse, relationship between quantity demanded relationship between quantity demanded
and price.”and price.”
Exception: A Exception: A Giffen goodGiffen good is a product for which a is a product for which a rise in rise in priceprice of this product makes people buy of this product makes people buy even more of the product.even more of the product.
Changes in Quantity Changes in Quantity Demanded vs. Change in Demanded vs. Change in
DemandDemand
““Ceteris Paribus” – all things equalCeteris Paribus” – all things equal
Changes in the price of a product affect Changes in the price of a product affect the the quantity demandedquantity demanded per period per period
Changes in any other factor, income or Changes in any other factor, income or preferences, affect preferences, affect demanddemand..
Demand Curve Demand Curve
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Change in quantity demanded Change in quantity demanded due to change in price due to change in price
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Non-Price determinants of Non-Price determinants of DemandDemand
Income and WealthIncome and Wealth Normal goods – higher demand when income is higherNormal goods – higher demand when income is higher Inferior Goods – lower demand when income is higherInferior Goods – lower demand when income is higher
Size of market (population)Size of market (population) Prices of Other Goods and ServicesPrices of Other Goods and Services
SubstitutesSubstitutes Complementary goodsComplementary goods
Taste and PreferencesTaste and Preferences ExpectationsExpectations Special InfluencesSpecial Influences
Non-Price determinants of Non-Price determinants of DemandDemand
Income and WealthIncome and Wealth Income – Is the sum of all wages, salaries, profits, interest Income – Is the sum of all wages, salaries, profits, interest
payments, rents and other form of earnings received in a given payments, rents and other form of earnings received in a given period of time.period of time.
Wealth- Total Value of what a household owns less what it Wealth- Total Value of what a household owns less what it owes.owes.
Size of market (population)Size of market (population) Prices of Other Goods and ServicesPrices of Other Goods and Services
Substitutes – when an increase of one good causes demand for Substitutes – when an increase of one good causes demand for another good to increase (positive relationship)another good to increase (positive relationship)
Complementary goods – decrease in the price of one results in Complementary goods – decrease in the price of one results in increase in demand for the otherincrease in demand for the other
Taste and PreferencesTaste and Preferences ExpectationsExpectations Special InfluencesSpecial Influences
Demand is determined by non-price Demand is determined by non-price demand-determining variables, such as, demand-determining variables, such as, income, price of related goods, and tastes.income, price of related goods, and tastes.
Changes in quantity demanded Changes in quantity demanded are shown are shown by movements along the demand curve.by movements along the demand curve.
Changes in demandChanges in demand are shown by shifting are shown by shifting the entire demand curve.the entire demand curve.
Demand curve shifts to the Demand curve shifts to the rightright
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Demand curve shifts to the Demand curve shifts to the left left
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Individual Market and Market DemandIndividual Market and Market Demand
Market demand is simply the sum of all the Market demand is simply the sum of all the quantities of a good or service demanded per quantities of a good or service demanded per period by all the households buying in the market period by all the households buying in the market for that good or service.for that good or service.
Individual Market and Market DemandIndividual Market and Market Demand
EndEnd