Successfully reported this slideshow.
Upcoming SlideShare
×

# Demand

3,782 views

Published on

• Full Name
Comment goes here.

Are you sure you want to Yes No
• Be the first to comment

### Demand

1. 1. Junhel Dalanon, DDM, MAT
2. 2. MODEL OF DEMAND <ul><li>The model of demand is an attempt to explain the amount demanded of any good or service. </li></ul>Demand slide DEMAND DEFINED The amount of a good or service a consumer wants to buy, and is able to buy per unit time.
3. 3. THE “STANDARD” MODEL OF DEMAND <ul><li>The DEPENDENT variable is the amount demanded. </li></ul><ul><li>The INDEPENDENT variables are: </li></ul><ul><ul><li>the good’s own price </li></ul></ul><ul><ul><li>the consumer’s money income </li></ul></ul><ul><ul><li>the prices of other goods </li></ul></ul><ul><ul><li>preferences (tastes) </li></ul></ul>Demand slide
4. 4. YOU COULD WRITE THE MODEL THIS WAY: <ul><li>The demand for tacos </li></ul><ul><li>Q D (tacos) = D(P tacos , Income, P spaghetti , P beer , </li></ul><ul><li>tastes) </li></ul>Demand slide
5. 5. <ul><li>ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENT VARIABLE AFFECT THE AMOUNT DEMANDED </li></ul>Demand slide
6. 6. THE DEMAND CURVE <ul><li>The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand. </li></ul><ul><ul><li>The DEPENDENT variable is the quantity demanded. </li></ul></ul><ul><ul><li>The INDEPENDENT variable is the good’s own price. </li></ul></ul>Demand slide
7. 7. THE LAW OF DEMAND <ul><li>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. </li></ul><ul><li>The Law of Demand says that demand curves are negatively sloped. </li></ul>Demand slide
8. 8. A DEMAND CURVE <ul><li>A demand curve must look like this, i.e., be negatively sloped. </li></ul>Demand slide own price quantity demanded demand Market for tacos
9. 9. The demand curve means: Demand slide You pick a price, such a p 0 , and the demand curve shows how much is demanded. own price quantity demanded demand Market for tacos p 0 Q 0
10. 10. What if the price of tacos were less than p 0 ? How do you show the effect on demand? Demand slide Go to hidden slide
11. 11. Demand slide At a lower price, consumers want to buy more. own price quantity demanded demand p 0 Q 0 Market for tacos p lower Q 1
12. 12. AN IMPORTANT POINT <ul><li>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. </li></ul>Demand slide
13. 13. Other factors affecting demand <ul><li>The question here is how to show the effects of changes in income, other goods’ prices, and tastes on demand. </li></ul>Demand slide
14. 14. <ul><li>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. </li></ul>Demand slide own price quantity of beer demand @ I = \$1000 Market for beer How does this affect the demand curve? \$1/can Go to hidden slide
15. 15. This is a change in demand. It shows up as a shift to the right of the original demand curve. Demand slide own price quantity demand @ I = \$1000 Market for beer \$1/can demand @ I = \$2000
16. 16. Normal and inferior goods defined <ul><li>Normal good : When an increase in income causes an increase in demand. </li></ul><ul><li>Inferior good : When an increase in income causes a decrease in demand. </li></ul>Demand slide
17. 17. Pizza is a normal good. Demand slide own price quantity demand @ I = \$1000 Market for pizza What’s the effect on the demand curve for pizza if income rises to \$2,000? Go to hidden slide
18. 18. An increase in income increases demand when pizza is normal. Demand slide own price quantity demand @ I = \$1000 Market for pizza demand @ I = \$2000
19. 19. Suppose instead that pizza was an inferior good. Demand slide own price quantity demand @ I = \$1000 Market for pizza What’s the effect on the demand curve for pizza if income rises to \$2,000? Go to hidden slide
20. 20. <ul><li>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. </li></ul>Demand slide price quantity demand @ I = \$1000 Market for pizza demand @ I = \$2000
21. 21. Substitutes defined <ul><li>Substitutes : Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other. </li></ul><ul><li>Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes. </li></ul>Demand slide
22. 22. The graph shows the demand curve for spaghetti when pizzas cost \$10 each. Demand slide own price quantity demand @ pizza price of \$10 Market for spaghetti What’s the effect of an increase in the price of pizza to \$15? Go to hidden slide
23. 23. An increase in the price of pizza, a substitute for spaghetti, causes an increase in demand for spaghetti. Demand slide own price quantity demand @ pizza price of \$10 Market for spaghetti demand @ pizza price of \$15.
24. 24. Complements defined <ul><li>Complements : Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. </li></ul><ul><li>Thus, an increase in the price of pizza would decrease the demand for beer if the goods were complements. </li></ul>Demand slide
25. 25. The graph shows the demand curve for beer when pizzas cost \$10 each. Demand slide price of beer quantity demand @ pizza price of \$10 Market for beer What is the effect on the market for beer of an increase in the price of pizza to \$15? Go to hidden slide
26. 26. When beer and pizza are complements, an increase in the price of pizza decreases the demand for beer. Demand slide price of beer quantity demand @ pizza price of \$10 Market for beer demand @ pizza price of \$15.
27. 27. The graph shows the demand curve for umbrellas on sunny days. Demand slide price of umbrellas quantity demand on sunny days Market for umbrellas What’s the effect on demand of it being a rainy day? Go to hidden slide
28. 28. This is an example of a change in tastes. Demand increases. Demand slide price of umbrellas quantity demand on sunny days Market for umbrellas demand on rainy days
29. 29. DEMAND SUMMARY <ul><li>Demand is a function of own-price, income, prices of other goods, and tastes. </li></ul><ul><li>The demand curve shows demand as a function of a good's own price, all else constant. </li></ul><ul><li>Changes in own-price show up as movements along a demand curve. </li></ul><ul><li>Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve. </li></ul>Demand slide
30. 30. The Law of Demand An increase in price will cause a decrease in the quantity demanded (inverse relationship) EXPLAINERS: Income effect Substitution effect
31. 31. The Law of Demand EXPLAINERS: Income effect Substitution effect Diminishing Marginal Utility
32. 32. The Law of Demand CHANGE IN PRICE= change in quantity demanded CHANGE IN OTHER= change in demand P 1 P 2 Q 1 Q 2 P Q A B P Q D 1 D 2
33. 33. The Law of Demand CHANGE IN OTHER= change in demand P Q D 1 D 2
34. 34. Determinants of Demand Things other than price that cause the whole curve to shift Increase: shift to the right Decrease: shift to the left
35. 35. Determinants of Demand Change in consumer tastes Change in people’s income normal goods inferior goods
36. 36. Determinants of Demand Change in prices of related goods complementary goods (inverse effect) substitute goods (direct effect) Change in expectations Change in size of market
37. 37. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (a) people change their preference from hamburgers to hot dogs?
38. 38. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (b) U.S. negotiates a deal w/ China to trade hot dogs for egg rolls?
39. 39. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (c) the price of ground beef plummets?
40. 40. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (d) the minimum wage rises?
41. 41. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (e) the MWU threatens a strike if owners fail to meet their demands?
42. 42. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (f) unemployment hits an all-time high?
43. 43. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (g) the price of buns increases due to a wheat shortage?
44. 44. Supply, Demand and Market Equilibrium
45. 45. Demand: Raw data
46. 46. Demand Schedule
47. 47. Demand Curve D
48. 48. Demand: Definition <ul><li>Relationship between price and quantity demanded at a given price </li></ul>
49. 49. Demand Curve D
50. 50. Demand Curve I D
51. 51. Change in quantity demanded due to change in price I II D
52. 52. Shifts in the Demand Curve <ul><li>income </li></ul><ul><li>related goods </li></ul><ul><li>tastes </li></ul><ul><li>number of consumers </li></ul><ul><li>expectations of future prices </li></ul>
53. 53. Demand curve shifts to the right D
54. 54. Demand curve shifts to the left D
55. 55. Demand for an intangible good <ul><li>For example, a promise exchanged for money </li></ul><ul><li>Value of the promise depends on future events </li></ul><ul><li>Examples </li></ul><ul><ul><li>loans </li></ul></ul><ul><ul><li>insurance </li></ul></ul>
56. 56. Demand for an intangible good <ul><li>Application: a futures contract </li></ul><ul><ul><li>value based on a future event </li></ul></ul><ul><ul><li>possible events </li></ul></ul><ul><ul><ul><li>price of a bushel of wheat in October </li></ul></ul></ul><ul><ul><ul><li>Microsoft stock price on 3rd Friday of June </li></ul></ul></ul><ul><ul><ul><li>value of the Euro in \$ on February 1st </li></ul></ul></ul><ul><ul><ul><li>price of oil on April 21st </li></ul></ul></ul>
57. 57. Assignment <ul><li>Political futures contract </li></ul><ul><ul><li>pays \$1 if Bradley is the Democratic nominee for 2000 </li></ul></ul><ul><ul><li>pays \$0 otherwise </li></ul></ul><ul><li>Price that someone is willing to pay is based on their own prediction of a particular outcome </li></ul><ul><li>Assignment: graphing a real demand curve </li></ul>
58. 58. Graph of Bradley demand data
59. 59. The effect of NBA party on demand for Bradley contracts
60. 60. Supply: Raw data
61. 61. Supply Schedule
62. 62. Supply Curve S
63. 63. Supply: Definition <ul><li>Relationship between price and quantity supplied at a given price </li></ul>
64. 64. Supply Curve I S
65. 65. Change in quantity supplied due to a change in price I II S
66. 66. Shifts in the Supply Curve <ul><li>prices of relevant resources </li></ul><ul><li>technology </li></ul><ul><li>taxes </li></ul><ul><li>number of sellers </li></ul><ul><li>expectations of future prices </li></ul>
67. 67. Supply curve shifts to the right S
68. 68. Supply curve shifts to the left S
69. 69. Supply for an intangible good <ul><li>Simplified insurance example </li></ul><ul><li>Why would anyone supply car insurance? </li></ul><ul><li>Seller expects that you will not have an accident during the next year </li></ul><ul><li>If you do, they pay the bills. If not, they still keep the premium (price of policy) </li></ul><ul><li>Prices depend on how likely there will be a claim </li></ul>
70. 70. Political Futures Contract <ul><li>Recall our example political futures contract </li></ul><ul><li>People holding this contract get \$1 if Bradley is the Democratic nominee for 2000 and \$0 otherwise </li></ul><ul><li>They may be willing to sell if they are not 100% sure that Bradley will be the nominee </li></ul><ul><li>Assignment 4: graphing a real supply curve </li></ul>
71. 71. Graph of Bradley supply data
72. 72. Effect of internet taxes on supply of Bradley contracts
73. 73. A Market S D
74. 74. Surplus S D Surplus Qd Qs
75. 75. Market adjustment to surplus S D Surplus Qd Qs
76. 76. Shortage S D Shortage Qd Qs
77. 77. Market adjustment to shortage S D Shortage Qd Qs
78. 78. Equilibrium S D Eq.Q Eq.P
79. 79. Government interventions: Price controls <ul><li>The government sets a maximum price </li></ul><ul><ul><li>Example: the price of basic commodities in many countries (milk, flour, bread, rice) </li></ul></ul><ul><ul><li>what happens to the availability of this good? </li></ul></ul><ul><li>The government sets a minimum price for wages </li></ul><ul><ul><li>Example: minimum wage </li></ul></ul><ul><ul><li>what happens to the supply of labor? </li></ul></ul>
80. 80. Equilibrium in the Bradley market
81. 81. Supply and demand information available in a real market Price Quantity S D Exchanges that already have occurred Offers to sell (ask price) Offers to buy (bid price) Market price (observed)
82. 82. Supply and demand information available in a real market Price Quantity S D Eq.Q Eq.Q +1 Best Ask Best Bid Last Trade Note: Eq.Q. is equilibrium quantity