chapter 2 demand p36-41 chapter 2 demand p36-41 demand the relationship between demand and pricethe...

Chapter 2Demand p36-41

Chapter 2Demand p36-41

DEMANDDEMAND

• The relationship between demand and The relationship between demand and priceprice

– the law of demandthe law of demand

DEMANDDEMAND

• The demand curveThe demand curve

• First we need some data on demand at First we need some data on demand at different pricesdifferent prices

The demand curve:The demand curve:The demand for potatoes (monthly)The demand for potatoes (monthly)

Total Market Demand Cureve for an Total Market Demand Cureve for an EconomyEconomy

• Total Market DemandTotal Market Demand

• = Add up all the individual demands= Add up all the individual demands

• Usually specify timeUsually specify time

• Total demand per yearTotal demand per year

• Or MonthOr Month

• Or Week etcOr Week etc

The demand curve:The demand curve:The demand for potatoes (monthly)The demand for potatoes (monthly)

0

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Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Demand

Price(pence per kg)

4

Market demand(tonnes 000s)

700A

Point

A

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

0

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Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Demand

Price(pence per kg)

4

8

Market demand(tonnes 000s)

700

500

A

B

Point

A

B

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

0

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Quantity (tonnes: 000s)

Pri

ce (

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ce p

er k

g)

Demand

Price(pence per kg)

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Market demand(tonnes 000s)

700

500

350

A

B

C

Point

A

B

C

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

0

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Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Demand

Price(pence per kg)

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Market demand(tonnes 000s)

700

500

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200

A

B

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D

Point

A

B

C

D

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

E

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Pri

ce (

pen

ce p

er k

g)

Demand

Price(pence per kg)

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Market demand(tonnes 000s)

700

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200100

A

B

C

D

E

Point

A

B

C

D

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

E

0

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0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Demand

Price(pence per kg)

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8

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Market demand(tonnes 000s)

700

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350

200100

A

B

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D

E

Point

A

B

C

D

E

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

0

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0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Demand

Note when price rises, quantity demanded falls

That is, move from A to E

A

B

C

D

E

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

0

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0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Demand

LAW of DEMAND

Quantity demanded falls when price rises,

ceteris paribus.

A

B

C

D

E

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

0

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Quantity (tonnes: 000s)

Pri

ce (

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ce p

er k

g)

Demand

Demand curve slopes down,

Ceteris paribus

A

B

C

D

E

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

Law of DemandLaw of Demand

• Price is one of the most important Price is one of the most important determinants of demanddeterminants of demand

• Sometimes we write:Sometimes we write:

• QQDD =f(P) =f(P)

• Or simplyOr simply

• Quantity is a function of PriceQuantity is a function of Price

Law of DemandLaw of Demand

• Price is one of the most important Price is one of the most important determinants of demand anddeterminants of demand and

• Quantity demanded falls as price rises Quantity demanded falls as price rises • OROR• Quantity demanded rises as price fallsQuantity demanded rises as price falls• …………………….. Ceteris paribus.. Ceteris paribus

• i.e. Quantity and price are negatively i.e. Quantity and price are negatively related related

• So Quantity is a So Quantity is a negativenegative function of price function of price

0

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0 100 200 300 400 500 600 700 800Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Negative means Change in Q is positive

When change in P is negative

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

Means same thing as Demand curve slopes down

0

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0 100 200 300 400 500 600 700 800Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Negative means Change in Q is positive

When change in P is negative

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

Means same thing as Demand curve slopes down

0

4

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0 100 200 300 400 500 600 700 800Quantity (tonnes: 000s)

Pri

ce (

pen

ce p

er k

g)

Negative means Change in Q is positive

When change in P is negative

Market demand for potatoes Market demand for potatoes (monthly)(monthly)

Means same thing as Demand curve slopes down

DEMANDDEMAND

• So what doesSo what does Ceteris Paribus Ceteris Paribus meanmean, , • ‘‘all other things held constant’ all other things held constant’

• So what are we holding constant?So what are we holding constant?• Suggestions Please:Suggestions Please:

• number and price of other goodsnumber and price of other goods– incomeincome– distribution of incomedistribution of income– tastestastes– expectationsexpectations

DEMANDDEMAND

• So P is important, but also other So P is important, but also other determinants of demand such as determinants of demand such as

– number and price of number and price of substitute substitute goodsgoods– number and price of number and price of complementarycomplementary

goodsgoods– incomeincome– distribution of incomedistribution of income– tastestastes– expectationsexpectations

Pri

ce

P

O Q0

Quantity

D0

How do these other things affect the demand curve?How do these other things affect the demand curve?

Lets look at the effect of a Substitute

Pri

ce

P

O Q0

Quantity

D0

How do these other things affect the demand curve?How do these other things affect the demand curve?

Suppose the price of Rice were to rise,

what would happen to the demand for

Potatoes?

Pri

ce

P0

O Q0

Quantity

D0

An increase in the price of a substituteAn increase in the price of a substitute

At P0 the quantity demanded would rise from Q0 to

Q1

Q1

Pri

ce

P

O Q0

Quantity

D0

An increase in the price of a substituteAn increase in the price of a substitute

The same thing would happen at all other prices

…the demand for potatoes rise,

when the price of rice rises.

Pri

ce

P

O Q0

Quantity

D0

An increase in the price of a substituteAn increase in the price of a substitute

So Demand would rise at

every price level.

And the demand curve moves out

D1

Pri

ce

P

O Q0

Quantity

D0

An increase in the price of An increase in the price of a substitutea substitute

..Causes the demand curve to SHIFT OUT

D1

DemandDemand

• What about a Complementary Good?What about a Complementary Good?

• Bangers and MashBangers and Mash

• Bangers Bangers Complement Complement the Potatoes the Potatoes

• So what will happen if the price of Bangers So what will happen if the price of Bangers were to rise?were to rise?

Pri

ce

P

O Q0

Quantity

D0

An increase in the price of a ComplementAn increase in the price of a Complement

What happens when price of Bangers Rise?

Demand for Potatoes fall

.. And the demand curve

for Potatoes shifts in

Pri

ce

P

O Q0

Quantity

D0

An increase in the price of a An increase in the price of a ComplementComplement

…Causes the demand curve to SHIFT IN

• Why are we emphasising the word SHIFTWhy are we emphasising the word SHIFT

• We said before that output was a function We said before that output was a function of price.of price.

• Q=f(P)Q=f(P)

• And when we drew the diagram we plotted And when we drew the diagram we plotted the quantity purchased at each pricethe quantity purchased at each price

Pri

ce

P

O Q0 Q1

Quantity

A Demand CurveA Demand Curve

D0

• But of course we have already noted that But of course we have already noted that other things effect demand, other things effect demand,

• Q=f(P, ………..)Q=f(P, ………..)

• eg, price of rice Peg, price of rice PRR

• And price of Bangers PAnd price of Bangers PBB

• So should write our equation asSo should write our equation as

• Q=f(P, PQ=f(P, PRR,P,PBB,……..),……..)

Pri

ce

P

O Q0 Q1

Quantity

A Demand CurveA Demand Curve

D0

•So when we change the So when we change the priceprice of of the goodthe good PP

•Q=f(Q=f(PP, P, PRR,P,PBB,……..),……..)

•We move We move alongalong the the curvecurve

Pri

ce

P

O Q0

Quantity

D0

D1

•E.g. change price E.g. change price PPRR, ,

•a substitutea substitute

•Q=f(Q=f(PP, , PPRR,,PPBB,……..),……..)

•the the SHIFTS SHIFTS curve outcurve out

•But when we change the But when we change the priceprice ofof other goods,other goods, we we SHIFT SHIFT the curvethe curve

Pri

ce

P

O Q0

Quantity

D0

•Or if we change the Or if we change the priceprice of a complement,of a complement, PPBB

•Q=f(Q=f(PP, , PPRR,P,PBB,……..),……..)

•We We SHIFT SHIFT the curve the curve inin

• So when we change the So when we change the price of the goodprice of the good P P

• Q=f(Q=f(PP, P, PRR,P,PBB,……..),……..)• We We Move ALONGMove ALONG Curve Curve

• When we change When we change any other variableany other variable

• Q=f(Q=f(PP, , PPRR,P,PBB, , ……..…….. ) )

• WeWe SHIFT SHIFT the curvethe curve

DEMANDDEMAND

• Other determinants of demandOther determinants of demand

– number and price of substitute goodsnumber and price of substitute goods– number and price of complementary goodsnumber and price of complementary goods– incomeincome– distribution of incomedistribution of income– tastestastes– expectationsexpectations

• Have not yet discussed effect of changes in Have not yet discussed effect of changes in IncomeIncome

Effects of changes in Income on DemandEffects of changes in Income on Demand

• Q=f(Q=f(PP, P, PRR,P,PBB,, I I, ……..), ……..)

• I = IncomeI = Income

• What would your expect?What would your expect?

• For most goods (For most goods (Normal GoodsNormal Goods) demand ) demand increasesincreases as as Income increaseIncome increase

• But for some goods (But for some goods (Inferior GoodsInferior Goods) ) demand demand fallsfalls as as income increasesincome increases– E.g. potatoes, rice E.g. potatoes, rice

Pri

ce

P

O Q0

Quantity

D0

An increase in IncomeAn increase in Income

For a Normal Good Demand

Shifts Out

D1

Pri

ce

P

O Q0

Quantity

D0

An increase in IncomeAn increase in Income

For an INFERIOR good demand SHIFT IN

DEMANDDEMAND

• In this module you learnt about:In this module you learnt about:

• The relationship between demand and The relationship between demand and priceprice

– the law of demandthe law of demand

– The effect of changes in other variablesThe effect of changes in other variables

– Movements along versus shifts in the demand Movements along versus shifts in the demand curvecurve

DEMANDDEMAND

• Demand functions: Some Mathematical Demand functions: Some Mathematical Examples. Page 39-41 of the textbookExamples. Page 39-41 of the textbook

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D

P

Q (000s)

Demand curve for equation: Demand curve for equation: QQdd = 10 = 10 000 – 200000 – 200PP

P

5

Qd (000s)

9

Demand curve for equation: Demand curve for equation: QQdd = 10 = 10 000 – 200000 – 200PP

D

P

Q (000s)

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P

510

Qd (000s)

98

Demand curve for equation: Demand curve for equation: QQdd = 10 = 10 000 – 200000 – 200PP

D

P

Q (000s)

0

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P

51015

Qd (000s)

987

Demand curve for equation: Demand curve for equation: QQdd = 10 = 10 000 – 200000 – 200PP

D

P

Q (000s)

0

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0 2 4 6 8 10

P

5101520

Qd (000s)

9876

Demand curve for equation: Demand curve for equation: QQdd = 10 = 10 000 – 200000 – 200PP

D

P

Q (000s)

0

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0 2 4 6 8 10