Demand and Supply

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MODEL OF DEMAND : 

Demand slide 1 MODEL OF DEMAND The model of demand is an attempt to explain the amount demanded of any good or service. DEMAND DEFINED The amount of a good or service a consumer wants to buy, and is able to buy per unit time.

THE “STANDARD” MODEL OF DEMAND : 

Demand slide 2 THE “STANDARD” MODEL OF DEMAND The DEPENDENT variable is the amount demanded. The INDEPENDENT variables are: the good’s own price the consumer’s money income the prices of other goods preferences (tastes)

YOU COULD WRITE THE MODEL THIS WAY: : 

Demand slide 3 YOU COULD WRITE THE MODEL THIS WAY: The demand for tacos QD(tacos) = D(Ptacos, Income, Pspaghetti, Pbeer, tastes)

Slide 4: 

Demand slide 4 ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENT VARIABLE AFFECT THE AMOUNT DEMANDED

THE DEMAND CURVE : 

Demand slide 5 THE DEMAND CURVE The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand. The DEPENDENT variable is the quantity demanded. The INDEPENDENT variable is the good’s own price.

THE LAW OF DEMAND : 

Demand slide 6 THE LAW OF DEMAND 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. The Law of Demand says that demand curves are negatively sloped.

A DEMAND CURVE : 

Demand slide 7 A DEMAND CURVE A demand curve must look like this, i.e., be negatively sloped. own price quantity demanded demand Market for tacos

The demand curve means: : 

Demand slide 8 The demand curve means: You pick a price, such a p0, and the demand curve shows how much is demanded. own price quantity demanded demand Market for tacos

What if the price of tacos were less than p0?How do you show the effect on demand? : 

Demand slide 9 What if the price of tacos were less than p0?How do you show the effect on demand? Go to hidden slide

Slide 10: 

Demand slide 10 At a lower price, consumers want to buy more. own price quantity demanded demand p0 Q0 Market for tacos

AN IMPORTANT POINT : 

Demand slide 11 AN IMPORTANT POINT 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.

Other factors affecting demand : 

Demand slide 12 Other factors affecting demand The question here is how to show the effects of changes in income, other goods’ prices, and tastes on demand.

Slide 13: 

Demand slide 13 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. own price quantity of beer demand @ I = $1000 Market for beer How does this affect the demand curve? $1/can Go to hidden slide

This is a change in demand. It shows up as a shift to the right of the original demand curve. : 

Demand slide 14 This is a change in demand. It shows up as a shift to the right of the original demand curve. own price quantity demand @ I = $1000 Market for beer $1/can

Normal and inferior goods defined : 

Demand slide 15 Normal and inferior goods defined Normal good: When an increase in income causes an increase in demand. Inferior good: When an increase in income causes a decrease in demand.

Pizza is a normal good. : 

Demand slide 16 Pizza is a normal good. 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

An increase in income increases demand when pizza is normal. : 

Demand slide 17 An increase in income increases demand when pizza is normal. own price quantity demand @ I = $1000 Market for pizza

Suppose instead that pizza was an inferior good. : 

Demand slide 18 Suppose instead that pizza was an inferior good. 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

Slide 19: 

Demand slide 19 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. price quantity demand @ I = $1000 Market for pizza

Substitutes defined : 

Demand slide 20 Substitutes defined Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other. Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.

The graph shows the demand curve for spaghetti when pizzas cost $10 each. : 

Demand slide 21 The graph shows the demand curve for spaghetti when pizzas cost $10 each. 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

An increase in the price of pizza, a substitute for spaghetti, causes an increase in demand for spaghetti. : 

Demand slide 22 An increase in the price of pizza, a substitute for spaghetti, causes an increase in demand for spaghetti. own price quantity demand @ pizza price of $10 Market for spaghetti

Complements defined : 

Demand slide 23 Complements defined Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. Thus, an increase in the price of pizza would decrease the demand for beer if the goods were complements.

The graph shows the demand curve for beer when pizzas cost $10 each. : 

Demand slide 24 The graph shows the demand curve for beer when pizzas cost $10 each. 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

When beer and pizza are complements, an increase in the price of pizza decreases the demand for beer. : 

Demand slide 25 When beer and pizza are complements, an increase in the price of pizza decreases the demand for beer. price of beer quantity demand @ pizza price of $10 Market for beer

The graph shows the demand curve for umbrellas on sunny days. : 

Demand slide 26 The graph shows the demand curve for umbrellas on sunny days. 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

This is an example of a change in tastes. Demand increases. : 

Demand slide 27 This is an example of a change in tastes. Demand increases. price of umbrellas quantity demand on sunny days Market for umbrellas

DEMAND SUMMARY : 

Demand slide 28 DEMAND SUMMARY Demand is a function of own-price, income, prices of other goods, and tastes. The demand curve shows demand as a function of a good's own price, all else constant. Changes in own-price show up as movements along a demand curve. Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve.

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