ECON107 Principles of Microeconomics Week 4 SEPTEMBER 2013

1. Chapter-3 ECON107Principles of MicroeconomicsWeek 4SEPTEMBER 2013

2. 3 Demand

3. Lesson Objectives • Define demand and quantity demanded • Describe a competitive market and think about a price as an opportunity cost • Explain law of demand and influences of demand • Explain how to draw demand curve and make demand schedule

4. Demand • Demandindicates how much of a good consumers are both willing and able to buy at each possible price during a given time period, other things constant. If you demand something, then you 1. Want it, 2. Can afford it, and 3. Have made a definite plan to buy it.

5. Quantity Demand • Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy. • The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price.

6. Law of Demand • An inverse relationship exists between price and quantity demanded when other things remaining the same. As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls

7. Law of Demand • Why does a change in the price change the quantity demanded? Two reasons: • Substitution effect • Income effect

8. Law of Demand • Substitution Effect When the price of a good falls, its relative price makes consumers more willing to purchase this good. Alternatively, when the price of a good increases, its relative price makes consumers less willing to purchase this good. • For example, when the price of Al-Baik declines while other prices remain constant, Al-Baik becomes relatively cheaper  consumers are more willing to purchase Al-Baik when its relative price falls  they tend to substitute Al-Baik for other goods.

9. Law of Demand • Income Effect: When the price of a good decreases, a person’s real income increases  increased ability to buy a good  increase in quantity demanded. When the price of a good increases  real income declines  reduces the ability to buy a good  decline in quantity demanded

10. P QD Demand Curve and Demand Schedule • A demand curve shows the relationship between the quantity demanded of a good and its price during a given period when other things are constant. DEMAND SCHEDULE Various Amounts $5 4 3 2 1 10 20 35 55 80 A Series of Possible Prices …a specified time period …other things being equal

11. P QD Demand Curve and Demand Schedule Price of Corn P $5 4 3 2 1 CORN 10 20 35 55 80 $5 4 3 2 1 D Q 10 20 30 40 50 60 70 80 Quantity of Corn o

12. A Change in Demand (Determinants or Factors of Demand) • Six main factors (determinants) that change demand are • The prices of related goods [Substitutes(can serve as replacements for one another) & Complements(go together)] • Expected future prices • Income • Expected future income and credit • Population (number of buyers and consumers) • Preferences (tastes)

13. A Change in Demand (Determinants or Factors of Demand) Changes in the prices of related goods • For substitutes goods, if an increase in the price of one the demand for the other increase and demand curve shifts to rightward and, conversely, if a decrease in the price of one shifts the demand for the other good leftward (Example: Pepsi & Coca Cola) • For complementary goods, if an increase in the price of one shifts the demand for the other leftward and a decrease in the price of one shifts the demand for the other rightward (car & petrol).

14. A Change in Demand (Determinants or Factors of Demand) Changes in Expected Future Prices, Income, & Credit • A change in consumer expectations with respect to future prices, future incomes & credit shifts current demand • If individuals expect income to increase in the future, current demand increases and demand curve shift rightward. Vice versa also true. • If individuals expect prices to increase in the future, current demand increases and demand curve shift rightward. Vice versa also true.

15. A Change in Demand (Determinants or Factors of Demand) Changes in Consumer Income • Normal goods: the demand increases when income increases and demand curve shift rightward. The demand decreases when income decreases and demand curve shift leftward (example: New car). • Inferior goods: the demand decreases when income increases and demand curve shift leftward. The demand increases when income decreases and demand curve shift rightward (example: Used car)

16. A Change in Demand (Determinants or Factors of Demand) Changes in Preference (Taste) • A favorable change in consumer preferences meansIf consumer preferences increase for a particular good then more of this good will be demanded at each price. Demand will increase and demand curve will shift rightward. • An unfavorable change in consumer preferences will decrease demand and demand curve will shift leftward.

17. A Change in Demand (Determinants or Factors of Demand) Changes in Population (number of buyers or consumers) • Increase in the number of consumers  increase in market demand it means market demand curve will shift rightward. • Decrease in the number of consumers  decrease in market demand it means market demand curve will shift leftward.

18. P QD A Change in Demand (Determinants or Factors of Demand) Price of Corn Increase in Quantity Demanded P $5 4 3 2 1 CORN 30 40 60 80 + 10 20 35 55 80 $5 4 3 2 1 Increase in Demand D’ D o Q 10 20 30 40 50 60 70 80 Quantity of Corn

19. A Change in Demand (Determinants or Factors of Demand) Changes in Taste (or Preference) • It is nothing more than your likes and dislikes as a consumer. Moreover, it refers consumer preferences. A favorable change in consumer preferences means If consumer preferences increase for a particular good then more of this good will be demanded at each price. Demand will increase and demand curve will shift rightward.

20. A Change in Demand (Determinants or Factors of Demand) Changes in Taste (or Preferences) • An unfavorable change in consumer preferences will decrease demand and demand curve will shift leftward.

21. Now it’s over for today. Do you have any question?