Lesson 3 Demand Theory

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Economics-Demand Theory

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  • Lesson 3 Demand Theory

    1. 1. Demand Theory September 25, 2006
    2. 2. Short Quiz
    3. 3. Questions <ul><li>What is Economics? Why study economics? (10pts) </li></ul><ul><li>Enumerate at least 3 Basic Economic Questions? (10pts) </li></ul><ul><li>What is Opportunity Cost? Give an example using a PPF curve. Describe what happens if the technology/resource increases for (a) 1 good and (b)both goods. (20pts) </li></ul><ul><li>Enumerate and give 1 example to the 4 Economic systems? Explain the example. (20pts) </li></ul><ul><li>Give 1 economic function of the Government and give an example. (20Pts) </li></ul><ul><li>Bonus: Draw the circular flow (20PTs) </li></ul>
    4. 4. Outline Basics of Demand Theory Demand defined Demand Schedule and Demand Curve Individual Demand and Market Demand Law of Demand Change in quantity demanded vs. change in demand- Non-Price determinants of Demand
    5. 5. What is Demand? <ul><li>It is the plan, or relationship, expressing different amounts of a product buyers are willing and able to buy at possible prices, assuming all other non-price factors remain the same. </li></ul><ul><li>Also known as Quantity Demanded </li></ul>
    6. 6. Demand Schedule <ul><li>Shows the quantities of a product that a household would be willing to buy at different prices </li></ul><ul><li>Example of Raw Data </li></ul>
    7. 7. Demand Schedule
    8. 8. The Demand Curve <ul><li>The demand curve shows how much of a good consumers are willing to buy as the price per unit changes holding non-price factors constant. </li></ul>
    9. 9. The Demand Curve Quantity Price ($ per unit) Horizontal axis measures quantity (Q) demanded in number of units per time period Vertical axis measures price (P) paid per unit in dollars
    10. 10. The Demand Curve D The demand curve slopes downward demonstrating that consumers are willing to buy more at a lower price as 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.
    11. 11. Example:
    12. 12. Law of Supply and Demand <ul><li>Term was first used </li></ul><ul><li>When Price rises, quantity demand falls </li></ul><ul><li>When Price falls, quantity demand rises </li></ul><ul><li>“ There is thus a negative, or inverse, relationship between quantity demanded and price.” </li></ul><ul><li>Exception: A Giffen good is a product for which a rise in price of this product makes people buy even more of the product. </li></ul>
    13. 13. Changes in Quantity Demanded vs. Change in Demand <ul><li>“ Ceteris Paribus” – all things equal </li></ul><ul><li>Changes in the price of a product affect the quantity demanded per period </li></ul><ul><li>Changes in any other factor, income or preferences, affect demand . </li></ul>
    14. 14. Demand Curve I D
    15. 15. Change in quantity demanded due to change in price I II D
    16. 16. Non-Price determinants of Demand <ul><li>Income and Wealth </li></ul><ul><ul><li>Normal goods – higher demand when income is higher </li></ul></ul><ul><ul><li>Inferior Goods – lower demand when income is higher </li></ul></ul><ul><li>Size of market (population) </li></ul><ul><li>Prices of Other Goods and Services </li></ul><ul><ul><li>Substitutes </li></ul></ul><ul><ul><li>Complementary goods </li></ul></ul><ul><li>Taste and Preferences </li></ul><ul><li>Expectations </li></ul><ul><li>Special Influences </li></ul>
    17. 17. Non-Price determinants of Demand <ul><li>Income and Wealth </li></ul><ul><ul><li>Income – Is the sum of all wages, salaries, profits, interest payments, rents and other form of earnings received in a given period of time. </li></ul></ul><ul><ul><li>Wealth- Total Value of what a household owns less what it owes. </li></ul></ul><ul><li>Size of market (population) </li></ul><ul><li>Prices of Other Goods and Services </li></ul><ul><ul><li>Substitutes – when an increase of one good causes demand for another good to increase (positive relationship) </li></ul></ul><ul><ul><li>Complementary goods – decrease in the price of one results in increase in demand for the other </li></ul></ul><ul><li>Taste and Preferences </li></ul><ul><li>Expectations </li></ul><ul><li>Special Influences </li></ul>
    18. 18. <ul><li>Demand is determined by non-price demand-determining variables, such as, income, price of related goods, and tastes. </li></ul><ul><li>Changes in quantity demanded are shown by movements along the demand curve. </li></ul><ul><li>Changes in demand are shown by shifting the entire demand curve. </li></ul>
    19. 19. Demand curve shifts to the right D
    20. 20. Demand curve shifts to the left D
    21. 21. Individual Market and Market Demand <ul><li>Market demand is simply the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service. </li></ul>
    22. 22. Individual Market and Market Demand
    23. 23. End

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