DEMANDMicro Economics

ObjectivesEnabling the students to learn about Fundamentals of demand and supply. Define demand with the help of demand

curve. The movement along the demand curve the shifts of the demand curve. Determinants of Demand

Recap: Answer first!!! Economic problem Scarcity Differentiate micro & macro Positive & normative economics Opportunity cost 3 big questions Factors of production Trade off Model building PPF

Objectives of the day By the end of this lecture you will be able

to Define demand curve Draw your own & market demand curve Analyze the movement along demand

curve Predict when & why to shift to another

demand curve Elaborate ceteris paribus/determinants

of demand

Markets A market is a group of buyers and

sellers of a particular good or service.

The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.

And Economics, especially Microeconomics is about how supply and demand interact in markets.

Market Types

Goods Market Money Market Labour Market Capital market

Goods Market: The markets in which goods and services are exchanged.

Money Markets: The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills , commercial paper, bankers' acceptances.

labor market :The input/factor market in which households supply work for wages to firms that demand labor.capital market: The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

Consumer

Consumer is a broad label for any individuals or households that use goods and services generated within the economy.

Demand Economists record

demand on a demand schedule and plot it on a graph as a demand curve that is usually downward sloping.

The downward slope reflects the relationship between price and quantity demanded: as price decreases, quantity demanded increases.

Demand Derive Demand Joint Demand

Utility In economics, utility is a measure of

relative satisfaction. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility.

Firms and Households: The Basic Decision-Making Units

A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

Households are the consuming units in an economy.

Demand in Markets

• The price of the product in question.

• The income available to the household.

• A household’s decision about the quantity of a particular output to demand depends on:

Demand in Product/Output Markets

• The household’s amount of accumulated wealth.

• The prices of other products (substitutes and complements) available to the household.

• A household’s decision about the quantity of a particular output to demand depends on:

Demand in Product/Output Markets

• The household’s tastes and preferences.

• The household’s expectations about future income, wealth, and prices.

• A household’s decision about the quantity of a particular output to demand depends on:

Demand in Product/Output Markets

Quantity demanded is the amount (number of units) of a product that a household would buy in a given time period if it could buy all it wanted at the current market price.

Price and Quantity Demand: The Law of Demand

A demand schedule is a table showing how much of a given product a household would be willing to buy at different prices.

Demand curves are usually derived from demand schedules.

PRICE (PER CALL)

QUANTITY DEMANDED (CALLS PER

MONTH)$ 0 30

0.50 253.50 77.00 3

10.00 115.00 0

ANNA'S DEMAND SCHEDULE FOR

TELEPHONE CALLS

Price and Quantity Demanded: The Law of Demand

The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.

PRICE (PER

CALL)

QUANTITY DEMANDED (CALLS PER

MONTH)$ 0 30

0.50 253.50 77.00 3

10.00 115.00 0

ANNA'S DEMAND SCHEDULE FOR

TELEPHONE CALLS

ActivityThink about any product that you

wanted to purchase these days.Make your table, showing increase

or decrease in prices and then make your demand curve.

Why does the Demand Curve Slope Downward?

Law of Demand Inverse relationship between price and

quantity. Law of Diminishing Marginal Utility.

Utility is the extra satisfaction that one receives from consuming a product.

Marginal means extra. Diminishing means decreasing.

Price and Quantity Demanded: The Law of Demand

The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price.• This means that demand curves slope downward.

From Household Demand to Market Demand

Assuming there are only two households in the market, market demand is derived as follows:

Activity

Take any product and make 3 demand curves of separate households ,now make one market demand curve for

them.

Determinants of Demand Market price Consumer income Tastes Expectations Number of buyers and sellers Substitutes Complements

Other Determinants of Household Demand

Normal Goods are goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Inferior Goods are goods for which demand falls when income rises.

Other Determinants of Household Demand

Substitutes are goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up.

Other Determinants of Household Demand

Complements are goods that “go together”; a decrease in the price of one results in an increase in demand for the other, and vice versa.

Shift of Demand Versus Movement Along a Demand Curve

• Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB.

A Change in Demand Versus a Change in Quantity Demanded

To summarize:Change in price of a good or service leads to

Change in quantity demanded(Movement along the curve).

Change in income, preferences, orprices of other goods or services

leads to

Change in demand(Shift of curve).

The Impact of a Change in Income

• Higher income decreases the demand for an inferior good

• Higher income increases the demand for a normal good

The Impact of a Change in the Price of Related Goods

• Price of hamburger rises

• Demand for complement good (ketchup) shifts left

• Demand for substitute good (chicken) shifts right• Quantity of hamburger

demanded per month falls

Change in Quantity Demanded versus Change in Demand

Change in Demand A shift in the demand curve, either

to the left or right. Caused by a change in a determinant other than the price.

Extension in demand Contraction in demand

Changes in Quantity Demanded

0

D1

Price of Cigarettes per Pack

Number of Cigarettes Smoked per Day

A tax that raises the price of cigarettes

results in a movement along the

demand curve.

A

C

20

2.00

$4.00

12

Consumer IncomeNormal Good

$3.002.502.001.501.000.50

21 3 4 5 6 7 8 9 10 1211

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

Increasein demand

An increase

in income...

D1D2

Consumer IncomeInferior Good

$3.002.502.001.501.000.50

21 3 4 5 6 7 8 9 10 1211

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

Decreasein demand

An increase

in income...

D1D2

What effect each of the following will have on the demand curve for the product B? If

product B becomes more fashionable The price of substitute product falls A decline in income if B is an inferior

good Consumers anticipate the price of B

will be lower in the near future The price of complementary good D

falls Foreign tariff barriers on B are

eliminated

Answer please!!! Explain law of demand. Why does demand curve slope downward? What are the determinants of demand? What happens to the demand curve when

any of these determinants change? Explain by making curves.

Distinguish between change in demand and change in quantity demand explain through diagrams.

Show extension & contraction of demand on curve.