The document discusses the standard model of demand, which defines demand as the amount of a good or service a consumer wants to buy and is able to buy per unit time. It states that demand is a function of a good's own price, income, prices of other goods, and tastes. The demand curve shows the quantity demanded at each price, holding all other determinants of demand constant. The law of demand says that demand curves are negatively sloped, so a decrease in price results in an increase in quantity demanded. Changes in a good's own price appear as movements along the demand curve, while changes in income, prices of other goods, and tastes appear as shifts in the entire demand curve.

1. MODEL OF DEMAND
The model of demand is an attempt to
explain the amount demanded of any good
or service.
DEMAND DEFINED
The amount of a good or service a
consumer wants to buy, and is able to
buy per unit time.
Demand slide 1

2. THE “STANDARD” MODEL OF
DEMAND
The DEPENDENT variable is the amount demanded.
The INDEPENDENT variables are:
the good’s own price
the consumer’s money income
the prices of other goods
preferences (tastes)
Demand slide 2

3. YOU COULD WRITE THE
MODEL THIS WAY:
The demand for tacos
QD(tacos) = D(Ptacos, Income, Pspaghetti, Pbeer,
tastes)
Demand slide 3

4. ECONOMISTS HAVE HYPOTHESES
ABOUT HOW CHANGES IN EACH
INDEPENDENT VARIABLE
AFFECT THE AMOUNT
DEMANDED
Demand slide 4

5. THE DEMAND CURVE
The demand curve for any good shows the quantity
demanded at each price, holding constant all other
determinants of demand.
The DEPENDENT variable is the quantity
demanded.
The INDEPENDENT variable is the good’s own
price.
Demand slide 5

6. THE LAW OF DEMAND
The Law of Demand says that a decrease in a
good’s own price will result in an increase
in the amount demanded, holding constant
all the other determinants of demand.
The Law of Demand says that demand curves
are negatively sloped.
Demand slide 6

7. A DEMAND CURVE
A demand curve must look like this, i.e.,
be negatively sloped.
own
price
demand
quantity demanded
Market for tacos
Demand slide 7

8. The demand curve means:
You pick a price, such a p0, and the demand curve shows
how much is demanded.
own
price
p0
demand
Q0 quantity demanded
Market for tacos
Demand slide 8

9. What if the price of tacos were
less than p0?
How do you show the effect on
demand?
Go to hidden slide
Demand slide 9

10. At a lower price, consumers want to buy more.
own
price
p0
plower
demand
Q0 Q1 quantity demanded
Market for tacos
Demand slide 10

11. AN IMPORTANT POINT
When drawing a demand curve notice that the
axes are reversed from the usual convention
of putting the dependent (y) variable on the
vertical axis, and the independent (x)
variable on the horizontal axis.
Demand slide 11

12. Other factors affecting demand
The question here is how to show the effects
of changes in income, other goods’ prices,
and tastes on demand.
Demand slide 12

13. Suppose people want to buy more of a good when
incomes rise, holding constant all other factors
affecting demand, including the good’s own
price.
own price
How does this affect the
How does this affect the
demand curve?
demand curve?
$1/can
demand @ I = $1000
quantity of beer
Market for beer
Demand Go to hidden slide slide 13

14. This is a change in demand. It shows up
as a shift to the right of the original
demand curve.
own price
$1/can
demand @ I = $2000
demand @ I = $1000
quantity
Market for beer
Demand slide 14

15. Normal and inferior goods
defined
Normal good: When an increase in income
causes an increase in demand.
Inferior good: When an increase in income
causes a decrease in demand.
Demand slide 15

16. Pizza is a normal good.
What’s the effect on the demand
What’s the effect on the demand
curve for pizza if income rises
curve for pizza if income rises
own price to $2,000?
to $2,000?
demand @ I = $1000
quantity
Market for pizza
Go to hidden slide
Demand slide 16

17. An increase in income increases demand
when pizza is normal.
own price
demand @ I = $2000
demand @ I = $1000
quantity
Market for pizza
Demand slide 17

18. Suppose instead that pizza was
an inferior good.
own price What’s the effect on the demand
What’s the effect on the demand
curve for pizza if income rises
curve for pizza if income rises
to $2,000?
to $2,000?
demand @ I = $1000
quantity
Market for pizza
Go to hidden slide
Demand slide 18

19. If pizza were inferior the demand would
decrease as income increases. Whether
a good is normal or inferior is a matter
of fact, not theory.
price
demand @ I = $1000
demand @ I = $2000
quantity
Market for pizza
Demand slide 19

20. Substitutes defined
Substitutes: Two goods are substitutes if an
increase in the price of one of them causes
an increase in the demand for the other.
Thus, an increase in the price of pizza would
increase the demand for spaghetti if the
goods were substitutes.
Demand slide 20

21. The graph shows the demand curve for
spaghetti when pizzas cost $10 each.
own price
What’s the effect of an increase in
What’s the effect of an increase in
the price of pizza to $15?
the price of pizza to $15?
demand @ pizza price of $10
quantity
Market for spaghetti
Go to hidden slide
Demand slide 21

22. An increase in the price of pizza, a substitute
for spaghetti, causes an increase in demand
for spaghetti.
own price
demand @ pizza price of $15.
demand @ pizza price of $10
quantity
Market for spaghetti
Demand slide 22

23. Complements defined
Complements: Two goods are complements
if an increase in the price of one of them
causes a decrease in the demand for the
other.
Thus, an increase in the price of pizza would
decrease the demand for beer if the goods
were complements.
Demand slide 23

24. The graph shows the demand curve for
beer when pizzas cost $10 each.
price of What is the effect on the
What is the effect on the
beer market for beer of an
market for beer of an
increase in the price of pizza
increase in the price of pizza
to $15?
to $15?
demand @ pizza price of $10
quantity
Market for beer
Demand Go to hidden slide slide 24

25. When beer and pizza are complements, an
increase in the price of pizza decreases
the demand for beer.
price of
beer
demand @ pizza price of $10
demand @ pizza price of $15.
quantity
Market for beer
Demand slide 25

26. The graph shows the demand curve for
umbrellas on sunny days.
What’s the effect on demand of
What’s the effect on demand of
price of it being aarainy day?
it being rainy day?
umbrellas
demand on sunny days
quantity
Market for umbrellas
Demand Go to hidden slide slide 26

27. This is an example of a change in tastes.
Demand increases.
price of
umbrellas
demand on rainy days
demand on sunny days
quantity
Market for umbrellas
Demand slide 27

28. DEMAND SUMMARY
Demand is a function of own-price, income, prices of
other goods, and tastes.
The demand curve shows demand as a function of a
good's own price, all else constant.
Changes in own-price show up as movements along
a demand curve.
Changes in income, prices of substitutes and
complements, and tastes show up as shifts in the
demand curve.
Demand slide 28