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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
4
8
12
16
20
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)
4
Market demand(tonnes 000s)
700A
Point
A
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
0
4
8
12
16
20
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)
4
8
Market demand(tonnes 000s)
700
500
A
B
Point
A
B
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
0
4
8
12
16
20
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)
4
8
12
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
4
8
12
16
20
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)
4
8
12
16
Market demand(tonnes 000s)
700
500
350
200
A
B
C
D
Point
A
B
C
D
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
E
0
4
8
12
16
20
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)
4
8
12
16
20
Market demand(tonnes 000s)
700
500
350
200100
A
B
C
D
E
Point
A
B
C
D
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
E
0
4
8
12
16
20
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)
4
8
12
16
20
Market demand(tonnes 000s)
700
500
350
200100
A
B
C
D
E
Point
A
B
C
D
E
Market demand for potatoes Market demand for potatoes (monthly)(monthly)
0
4
8
12
16
20
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
4
8
12
16
20
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
4
8
12
16
20
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
Pri
ce (
pen
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
4
8
12
16
20
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
8
12
16
20
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
8
12
16
20
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
0
10
20
30
40
50
0 2 4 6 8 10
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)
0
10
20
30
40
50
0 2 4 6 8 10
P
510
Qd (000s)
98
Demand curve for equation: Demand curve for equation: QQdd = 10 = 10 000 – 200000 – 200PP
D
P
Q (000s)
0
10
20
30
40
50
0 2 4 6 8 10
P
51015
Qd (000s)
987
Demand curve for equation: Demand curve for equation: QQdd = 10 = 10 000 – 200000 – 200PP
D
P
Q (000s)
0
10
20
30
40
50
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
10
20
30
40
50
0 2 4 6 8 10