ECON107Principles of

MicroeconomicsWeek 4

SEPTEMBER 2013

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Chapter-3

3 Demand

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

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Demand Demand indicates 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 you1. Want it,2. Can afford it, and3. Have made a definite plan to buy it.

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Quantity DemandWants 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.

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Law of DemandAn inverse relationship exists

between price and quantity demanded when other things remaining the same.

As Price Falls… …Quantity Demanded RisesAs Price Rises… …Quantity Demanded Falls

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Law of DemandWhy does a change in the price change the quantity demanded? Two reasons:

Substitution effect Income effect

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Law of Demand Substitution EffectWhen 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.

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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

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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.

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$54321

DEMAND SCHEDULE

Various AmountsVarious Amounts

A Series of Possible PricesA Series of Possible Prices

…a specified time period

…other things being equal

P QD

1020355580

Demand Curve and Demand Schedule

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P

Q

o

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

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)

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A Change in Demand (Determinants or Factors of Demand)

Changes in the prices of related goodsFor 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).

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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.

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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)

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A Change in Demand (Determinants or Factors of Demand)

Changes in Preference (Taste) 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. An unfavorable change in consumer preferences will decrease demand and demand curve will shift leftward.

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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.

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A Change in Demand (Determinants or Factors of Demand)

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P

Qo

$5

4

3

2

1

P QD

$54321

D

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

D’

Increasein

Demand

Increasein QuantityDemanded

1020355580

30406080 +

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.

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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.

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

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