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  • 1. DemandDemand
  • 2. OutlineOutlineI. What is Demand?A. The Circular Flow DiagramB. Demand SchedulesC. The Law of DemandD. Demand Curves/Market DemandII. Change in Demand vs. Change in QuantityDemandedA. Change in DemandB. Change in Quantity Demanded
  • 3. The Circular Flow DiagramThe Circular Flow Diagram• We can simplify the whole economy intowhat is called the Circular Flow Diagram• The Circular Flow Diagram shows therelationship between what people want tobuy and what firms are willing to sell
  • 4. ResourceMarketThe Circular Flow DiagramThe Circular Flow DiagramProductMarketHouseholdsFirmsFor Instance, CompactDiscs -- HouseholdsWant To Buy (Demand)Them and Firms Wantto Sell (Supply)Them.To Produce CompactDiscs -- Firms WantTo Buy (Demand)Labor and HouseholdsWant to Sell (Supply) it.DemandDemandSupplySupply
  • 5. What is Demand?What is Demand?As we discussed earlier - there is a limitedamount of goods out there. So how do wedecide what we want? The concept ofdemand captures this issue. Demand ismade up of two elements:– Desire for Goods and Services– Means to purchase those Goods and Services
  • 6. Demand SchedulesDemand Schedules• Let consider how many CDs you mightdemand in a month. (This is called“Quantity Demanded”)• We will first look at this information in atable called a “Demand Schedule”• Demand Schedule - a table showing therelationship between the price of a good andthe quantity demanded per period of time,ceteris paribus.
  • 7. Demand ScheduleDemand SchedulePrice of CDs ($) Quantity Demandedper month
  • 8. Demand ScheduleDemand ScheduleP ($) Qd$20 5
  • 9. Demand ScheduleDemand ScheduleP ($) Qd$20 5$15 7
  • 10. Demand ScheduleDemand ScheduleP ($) Qd$20 5$15 7$10 15
  • 11. Law of DemandLaw of Demand• Law of Demand - the price of a product (orservice) is inversely related to the quantitydemanded, ceteris paribus.
  • 12. Demand Schedules and CurvesDemand Schedules and Curves• Another way of characterizing Demandinstead of using a schedule is a DemandCurve.• Demand Curve - a diagram showing therelationship between the price of a good andthe quantity demanded per period of time,ceteris paribus.
  • 13. Demand CurveDemand Curve
  • 14. Demand CurveDemand CurveP($)Qd per monthNote: ALWAYS label your axes!
  • 15. Demand CurveDemand CurveP($)Qd per month51015200 5 10 15
  • 16. Demand CurveDemand CurveP($)Qd per month51015200 5 10 15A
  • 17. Demand CurveDemand CurveP($)Qd per month51015200 5 10 15AB
  • 18. Demand CurveDemand CurveP($)Qd per month51015200 5 10 15ABC
  • 19. Demand CurveDemand CurveP($)Qd per month51015200 5 10 15ABCD
  • 20. Market Demand CurveMarket Demand Curve• The demand curve we just drew was theDemand for CDs by one person.• Market Demand Curve - a curve showingthe relationship between the price of a goodand the total quantity demanded by allconsumers in the market per period of time,ceteris paribus.Market demand curves areobtained by summing the demand curves ofindividual consumers.
  • 21. Market Demand ScheduleMarket Demand Schedule• Market Demand Schedule - a table showingthe relationship between the price of a goodand the total quantity demanded by allconsumers in the market per period of time,ceteris paribus.• Market demand schedules are obtained bysumming the demand schedules ofindividual consumers.
  • 22. Market Demand ScheduleMarket Demand ScheduleP($) MaryÕsQd5 310 215 1
  • 23. Market Demand ScheduleMarket Demand ScheduleP($) MaryÕsQdJohnÕsQd5 3 1210 2 815 1 3
  • 24. Market Demand ScheduleMarket Demand ScheduleP($) MaryÕsQdJohnÕsQdTomÕsQd5 3 12 710 2 8 515 1 3 4
  • 25. Market Demand ScheduleMarket Demand ScheduleP($) MaryÕsQdJohnÕsQdTomÕsQdMarketQd5 3 12 7 2210 2 8 5 1515 1 3 4 8
  • 26. Change in D vs. Change in QChange in D vs. Change in Qdd• Change in Demand - a change in the desireor means to purchase the good, thus there isa change in quantity demanded at EVERYprice.• Change in Demand - a shift of the demandcurve• A demand curve is drawn under theassumption of ceteris paribus.• When this assumption is relaxed, the entire demandcurves shifts
  • 27. Change in D vs. Change in QChange in D vs. Change in Qdd• Changes in Demand• Increase in demand - demand curve shifts to theright• Decrease in demand - demand curve shifts tothe left
  • 28. Change in DemandChange in Demand• Factors Which Cause a Change in Demand– Number of Buyers– Tastes and Preferences– Income– Price of Other Goods– The Availability of Credit– Expectations about Future Prices
  • 29. Change in Demand - Number ofChange in Demand - Number ofBuyersBuyersThe more buyers in the market for a good, thegreater the total quantity demanded (by thewhole economy) of the good at a givenprice. Since the quantity demanded ishigher at every given price, the demand hasincreased.Likewise, if there are less buyers in themarket there is less quantity demanded atevery price, so demand has decreased.
  • 30. Change in Demand - Tastes andChange in Demand - Tastes andPreferencesPreferences• Let’s say we find out listening to CDs canimprove your hearing, or what if suddenlyCDs become very fashionable to buy? Ifconsumers prefer a good more, the demandfor the good increases (a rightward shift ofthe demand curve).• What if we find out CDs emit dangerousradiation? If consumers prefer a good less,the demand for the good decreases (aleftward shift of the demand curve).
  • 31. Change in Demand - IncomeChange in Demand - Income• Let’s say that you graduate from Miami andstart making a substantial income. Whatmight we expect to happen to the amount ofCDs you would want to buy?– It would increase! You would be willing andable to purchase more CDs at every price. Thuswe say that Demand increased.
  • 32. Change in Demand - IncomeChange in Demand - Income• Let’s say that after a year at your new jobthe boss cuts salaries by 30%. Whathappens to Demand?– It would decrease. You are now have lessmeans to purchase CDs at all prices.
  • 33. Normal and Inferior GoodsNormal and Inferior Goods• Given the information we have, we can saythat CDs are a “normal good”• Normal Good - any good which increases indemand as income increases (and vice-versa)• Now let’s consider Macaroni & Cheese. Afine food that most college students partakein. What happens to your demand for Macand Cheese when you get a job?– It probably goes down. You will buy better
  • 34. Normal and Inferior GoodsNormal and Inferior Goods• If your boss cuts your income, though youmight start eating more Mac and Cheese.This means that Mac and Cheese is an“inferior good”• Inferior Good - any good which decreases indemand as income increases (and vice-versa)
  • 35. Change in Demand - Price ofChange in Demand - Price ofOther GoodsOther Goods• Mini-Discs are a lot like CDs, but arerecordable. They are presently veryexpensive relative to CDs• What would happen to the Demand for CDsif the price of Mini-Discs fell?– The demand for CDs would probably fall sincepeople would be buying Mini-Discs instead.
  • 36. Change in Demand - Price ofChange in Demand - Price ofOther GoodsOther Goods• What would happen to the Demand for CDsif the price of Mini-Discs rose?– The demand for CDs would probably rise sincepeople would buy the CDs instead.• This relationship between CDs and Mini-Discs implies they are “substitutes.”• Substitute - a good which can be consumed inplace of another good
  • 37. Change in Demand - Price ofChange in Demand - Price ofOther GoodsOther Goods• Thus an increase in the price of a substitutewill increase the demand for the good• And a decrease in the price of a substitutewill decrease the demand for the good
  • 38. Change in Demand - Price ofChange in Demand - Price ofOther GoodsOther Goods• What if the price of CD Players goes up?What ought to happen to the demand forCDs?– It ought to go down, since people need CDplayers to play CDs. If the price of CD playersrises, the quantity demand of CD players willgo down. If less people have CD Players, thenthere are less people in the market for CDs.
  • 39. Change in Demand - Price ofChange in Demand - Price ofOther GoodsOther Goods• What if the price of CD Players goes down?– The demand for CDs ought to go up, sincemore CD players are being used.• This relationship between CDs and CDPlayers implies they are “complements.”• Complement - a good which is consumed alongwith the consumption of another good
  • 40. Change in Demand - Price ofChange in Demand - Price ofOther GoodsOther Goods• Example - Peanut Butter and Jelly arecomplements.• If price of peanut butter increases, consumerspurchase less peanut butter• Law of demand tells us this• Result - Consumers purchase less jelly• Since buy less peanut butter need less jelly forPB&J sandwiches
  • 41. Change in Demand - Price ofChange in Demand - Price ofOther GoodsOther Goods• Thus, either of the following will increaseDemand• Price of a substitute good increases• Price of a complement good decreases• And either of the following will decreaseDemand• Price of a substitute good decreases• Price of a complement good increases
  • 42. Change in Demand - AvailabilityChange in Demand - Availabilityof Creditof Credit• If it is easier to borrow money (credit cardshave lower interest rates or are easier toobtain, etc.), do you think people will buymore or less of a good at a given price?– Probably more. Since people can buy thingsthat couldn’t buy before, their means have (in asense) increased. So an increase in theavailablity of credit will increase demand.
  • 43. Change in Demand - AvailabilityChange in Demand - Availabilityof Creditof Credit• If it is harder to borrow money, what doyou think will happen to the demand forCDs?– It will probably decrease, since people willhave less ability to buy CDs.
  • 44. Change in Demand -Change in Demand -Expectations about Future PricesExpectations about Future Prices• If we were to hear a new story about howCD prices were going to go up next month,would you buy that CD you have had youreye on now or later?– Now. If you know prices will rise, you willwant to buy more now, so you can avoid payingthe higher price in the future. So demand willincrease in response to this information
  • 45. Change in Demand -Change in Demand -Expectations about Future PricesExpectations about Future Prices• Likewise, if we hear that CD prices aregoing to drop next month, what do we donow?– It is likely that we will buy less now, waiting tobuy that new CD until the prices fall nextmonth, thus demand will decrease.
  • 46. Change in Demand vs. Change inChange in Demand vs. Change inQuantity DemandedQuantity DemandedThis is a very important distinction. In short -a change in demand is a shift in theWHOLE demand curve. People are willingto buy more (or less) at every price.
  • 47. Change in Quantity DemandedChange in Quantity Demanded• Change in Quantity Demanded (∆Qd) -movement along a demand curve• A change in quantity demanded can only becaused by a change in the price of the good.• Changes in Quantity Demanded• Increase in Qd - a movement to the right along ademand curve• Decrease in Qd - a movement to the left along ademand curve
  • 48. Increase in DemandIncrease in Demand
  • 49. Increase in DemandIncrease in DemandPQd
  • 50. Increase in DemandIncrease in DemandPQdD
  • 51. Increase in DemandIncrease in DemandPQdD
  • 52. Increase in DemandIncrease in DemandPQdD D’
  • 53. Increase in QIncrease in Qdd
  • 54. Increase in QIncrease in QddP($)Qd
  • 55. Increase in QIncrease in QddP($)QdD
  • 56. Increase in QIncrease in QddP($)QdDA
  • 57. Increase in QIncrease in QddP($)QdDA
  • 58. Increase in QIncrease in QddP($)QdDAB