Demand
Chapter 2
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Demand analysis - intuition
Marginal Cost/Marginal Benefit analysis of consumers
If Marginal Benefit > Marginal Cost, buy it
If Marginal Benefit < Marginal Cost, don’t buy it
Marginal Benefit is reflected by what consumer is willing to pay. Marginal Cost is price of item.
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Individual’s Demand for Gasoline (based on individual’s willingness to pay)
Depends on, Individual’s Income Price of Gasoline Prices of Related Goods (automobiles,
bus ticket, etc.) Individual’s Tastes/Preferences Individual’s expectation of future prices
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Market Demand for Gasoline
Obtained by summing all individual demands.
Depends on, All factors that affect individuals’ demands Number of Individuals (population)
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Graphing Demand
• The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded - fixing all the other factors that affect quantity demanded.
• The demand curve is the line relating price to quantity demanded - fixing all the other factors that affect quantity demanded.
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Graphing DemandSchedule:
QuantityPrice Demanded
10 09 18 27 36 45 54 63 72 81 90 10
Gasoline Market
0123456789
10
0 1 2 3 4 5 6 7 8 9 10
D
Q=Quantity of Gas
P=Price of Gas = $/Q
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Law of Demand
Is the relationship between price and quantity demanded positive or negative?Negative (Price and quantity demand move in opposite directions)
Law of demand More of a good will be demanded, the lower its price.
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Change in quantity demanded
results from a change in price, all else equal
shown as a movement along the demand curve
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Change in demand
results from a change in a factor other than price
shown as a shift of the entire demand curve
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Notation
D=Demand QD=Quantity Demanded
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Example of Change in Demand due to income change Income Increases At every price, do people
want to buy more or less? For Gasoline, More! Demand increases Shifts right
Gasoline Market
0
2
4
6
8
10
12
0 1 2 3 4 5 6 7 8 9 10
Quantity of Gas = Q
Pri
ce/G
allo
n of
Gas
= P
D0
D1
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Normal Good
A good for which demand increases when income increases
Examples:
Premium Beers and wine
Disneyland
Gasoline
Lego Robotic
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Income Increases for an Inferior Good
Inferior goods are goods where demand decreases when income increases.
Examples:
Pabst Blue Ribbon Beer
Certain Products at Wal-Mart
Generic Diapers
Yugos (perhaps)13
Income Increases for an Inferior Good Income Increases At every price, do
people want to buy more or less?
Less! Demand
decreases Shifts left
Q
P
D0D1
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Change in demand due to change in the price of a related good Substitutes
Two goods that satisfy similar needs or desires
Examples:
Diet Pepsi and Diet Coke Strawberries and Raspberries
Gasoline and Manual Lawn Mowers 15
Change in demand due to change in the price
of a related good: Substitutes Price of a
substitute good decreases
Demand Decreases
Shifts Left
D1
Q
P
D0
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Change in demand due to change in the price
of a related good: Substitutes
What happens if the price of a substitute increases?
Demand Increases/Shifts Right
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Change in demand due to change in the price of a related good:
Complements Two goods that are used jointly in consumption.
Examples:Tires and GasolineTires and AutomobilesBeer and Pizza
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Change in demand due to change in the price
of a related good: Complements Price of a
complementary good decreases
Demand Increases
Shifts right
D1
Q
P
D0
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Change in demand due to change in the price
of a related good: Complements
What happens if the price of a complement increases?
Demand decreases/Shifts left
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Change in demand due to...
Tastes: Positive Change
demand increasesshifts curve right
Negative Changedemand decreasesshifts curve left
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Change in demand due to...
Population... Increase
demand increasesshifts curve right
Decreasedemand decreasesshifts curve left
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Change in demand due to...
Expected: Price Increase
demand increasesshifts curve right
Price Decreasedemand decreasesshifts curve left
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Change in demand
results from a change in a factor other than price
shown as a shift of the entire demand curve
change in anything other than price
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Demand = Willingness to PayGasoline Market
0123456789
10
0 1 2 3 4 5 6 7 8 9 10
D
Q=Quantity of Gas
P=Price of Gas = $/Q
P=
Consumer Surplus(The value consumers get from a good but do not have to pay for.)
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Demand Function for Good X
QDx = f(Px, PY, M, H1 , H2, …)
where,
Px is the price of good X,PY is the price of good Y,M is income,H1 is size of population,H2 is consumers’ expectations,…
On the prior graph for gasoline, QDx = 10 - Px
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