What did you study last time?

1. CRC Economics

2. What did you study last time? Chapter 4 The Market Forces of Demand & Supply Introduction CRC Economics

3. What do you study now? Chapter 4 The Market Forces of Demand & Supply • Demand CRC Economics

4. Do you know … • how much of a good/service that a buyer buys? • what happens when the price of the good/service changes? • what happens when factors other than the price of the good/service change? • how to find market demand? CRC Economics

5. 1. How much of a good/service does a buyer buy? • The quantity that a buyer buys depends on: • the price of the good/service, and • other factors. • Let us define: • Qd as the quantity demanded (how much one is willing and able to buy), and • P as the price of the good/service CRC Economics

6. 1. How much of a good/service does a buyer buy? • The general demand function is written as: Qd = f (P, other factors) where f means a function of or depends on • The relationship between Qd and P, with other factors assumed to be constant, is called demand (D). Qd = f (P), other factors = constant (D) CRC Economics

7. 1. How much of a good/service does a buyer buy? • Demand can be expressed as • a schedule (table), • a curve (graph), or • an equation (function). CRC Economics

8. 2. What happens when the price of the good/service changes? • The law of demand • Demand schedule (table) • Demand curve (graph) • Demand equation (function) • A general demand curve • Movement along the demand curve CRC Economics

9. a. The law of demand • Ceteris paribus, if price (P) falls, then quantity demanded (Qd) rises, and vice versa. • Ceteris paribus is an assumption. • It means that other factors are assumed to be unchanged. CRC Economics

10. a. The law of demand • The law of demand states that if other things being the same, people would buy less of a good if the price of the good is higher. They would buy more if the price is lower. • Qd = f (P), ceteris paribus, so • if P rises, Qd falls, or • if P falls, Qd rises. CRC Economics

11. a. The law of demand • For example, today a person stops at a gas station for gasoline. He/she bought 10 gallons last week and paid $3.00 for a gallon. • If today the price is $4.00, it is likely that he/she would buy less than 10 gallons. • If today the price is $2.00, it is likely that he/she would buy more than 10 gallons. CRC Economics

12. 2. Demand schedule (table) Point P Qd a $0.0 12 At different prices, a consumer would buy different amounts. b $0.5 10 c $1.0 8 d $1.5 6 e $2.0 4 f $2.5 2 g $3.0 0 CRC Economics

13. c. Demand curve (graph) P $4.0 Plotting and connecting the points in the demand schedule, we trace out the demand (D) curve. $3.0 $2.0 D $1.0 Q CRC Economics 0 4 12 2 6 8 10

14. d. Demand equation (function) P What is the function of the demand curve shown? $4.0 P = slope*Qd + VI = -1/4 Qd + 3 $3.0 $2.0 D $1.0 Q CRC Economics 0 4 12 2 6 8 10

15. e. A general demand curve P Ceteris paribus, • At P1, the consumer is • at point A, buying Q1. if P is down, Qd is up, A and vice versa. P1 2. When the price falls to P2, the consumer is at point B, buying Q2. B 3. The demand (D) curve is the curve going through two points A and B. P2 D O Q CRC Economics Q1 Q2

16. f. Movement along the demand curve, or DQd, is caused by a change in price. P 4. A change in price causes a change in quantity demanded; this is shown as a movement along the existing demand curve. 3. DP => DQd D $3.0 2. At P= $2, the buyer is at point e, buying 4 units. e $2.0 1. At P=$.5, the buyer is at point b, buying 10 units. DP b $0.5 Q CRC Economics 0 12 4 10 DQd

17. f. Movement along a demand curve = change in quantity demanded (DQd) P 1. Suppose that consumers are at point A originally. B P1 A decrease in Qd DP 2a. Then P rises, … A P0 An increase in Qd 2b. or P falls, … DP C P2 D DQd DQd O Q CRC Economics Q1 Q0 Q2

18. 3. What happens when factors other than the price of the good/service change? • What are other factors? • What happens when other factors change? • Shifts (or changes) in demand CRC Economics

19. a. What are other factors? • Other factors affecting (changing) demand include: • Income/wealth • Prices of other related goods(substitutes & complements) • Tastes/preferences • Expectations CRC Economics

20. b. What happens when other factors change? • If the price (P) of the good/service is the same and • any of the other factors changes, • then at the same price (P), Qd changes, • so demand (D) changes. • This is shown by a shift in the entire demand curve. • If DP = 0, D other factors => DQd = DD CRC Economics

21. 1) What happens when income/wealth changes? • Suppose that a consumer has more income/wealth. At the same price (P), • he or she would buy more of normal goods, e.g. new cars, or • he or she would buy less of inferior goods, e.g. used cars. • Changes in income/wealth change the demand for goods/services. CRC Economics

22. 2) What happens when the prices of related goods change? • Suppose that a consumer plans to buy Pepsi. • Suppose further that Coke is on sale, so Coke is cheaper compared to Pepsi. • If either soft drink is OK with the consumer, she would likely buy Coke, instead of Pepsi. • Pepsi and Coke are substitutes. • The change in the price of a related good, Coke, changes the demand for another good, Pepsi. CRC Economics

23. 2) What happens when the prices of related goods change? • Suppose that a consumer plans to buy a big SUV and the price of gasoline increases. • The consumer may decide to drop her plan to buy the SUV, and settle with a small compact. • Cars and gasoline are complements. They are used together. • The change in the price of a related good, gasoline, changes the demand for another good, SUV. CRC Economics

24. 3) What happens when tastes/preference change? • Suppose that a research report just came out saying that drinking wine moderately will be good for the heart. • Many consumers will start buying wine. • The change in tastes/preferences changes the demand for a good. CRC Economics

25. 3) What happens when expectations change? • Suppose that the government will impose a new tax on gasoline starting tomorrow. • Many consumers will fill up their gas tanks TODAY. • Expectations change the demand for a good. CRC Economics

26. c. Shift/Change in demand (DD) is caused by a change in other factors P 3. A change in other factors causes a shift in the demand curve. A B 2. At the same price, a factor changes, the consumer is at point B on D1 buying Q1. P0 DD • At P0, a consumer • is at point A on D0, • buying Q0. D1 DQd D0 O Q CRC Economics Q0 Q1

27. c. Shift in demand =change in demand (DD) P 3. A change in other factors increases demand, shifting the demand curve to the right. • Suppose that consumers • are at point A originally. C B A P0 Decrease in D Increase in D 2. A change in other factors decreases demand, shifting the demand curve to the left. D1 D0 D2 O Q CRC Economics Q2 Q0 Q1

28. 4. How to find the market demand? • The market demand is the horizontal summation of all individuals’ demands for a particular good or service. • Qd(market) = S Qd(individuals) @each P • A new factor (the number of buyers) is added to the list of other factors. CRC Economics

29. Now you know … • how much of a good/service that a buyer buys. • what happens when the price of the good/service changes. • what happens when factors other than the price of the good/service change. • how to find the market demand. CRC Economics

30. Summary • How much of a good/service that a buyer buys depends on its price and otherfactors. • When the price of a good increases, a buyer would often buy less. • When the price of a good decreases, a buyer would often buy more. CRC Economics

31. Summary • The condition is that other factors stay unchanged. • The change in price causes a movement along the existing demand curve. CRC Economics

32. Summary • When other factors change, even at the same price, a buyer would often buy a different amount. • The changes in other factors cause shifts in the demand curve. • The market demand is the sum of all buyers’ demands. CRC Economics

33. What did you study? Chapter 4 The Market Forces of Demand & Supply • Demand CRC Economics

34. What will you study next? Chapter 4 The Market Forces of Demand & Supply • Supply CRC Economics

35. See You! Take Care! CRC Economics