Demand Inclass

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Dem and & Supp l y : A F i r s t L o o k

Foster


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The behavior of buyers and sellers in a laissez-faire economydetermines what gets produced, how it is produced, and whogets it.

La i s se z -Fa ir e : The F r ee M a rke t

In fact, pure market systems do not exist in the world; all

real systems are in some sense mixed.


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M a r ke ts a nd C o m pe t i t io n

Acompetitive market is one with many buyersand sellers, each has a negligible effect on price.

In a perfectly competitive market:All goods exactly the same

Buyers & sellers so numerous that no one can affect

market price each is a price takerIn the discussion that follows we will assume

markets are perfectly competitive.

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Foster Principles of Microeconomics


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The quantity demanded of any good is theamount of the good that buyers are willing andable to purchase.

Law of demand: the claim that the quantitydemanded of a good falls when the price of thegood rises and vice versa, other things equal.Income Effect

Substitution Effect

0D e m a n d



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T h e D e m a n dSchedu l e

Demand schedule:a table that shows therelationship between theprice of a good and thequantity demanded

Example:Helens demand for lattes.

Priceoflattes

Quantityof lattesdemanded

$0.0016

1.00142.0012

3.0010

4.008

5.006

6.004

Notice that Helens

preferences obey the

Law of Demand.

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$ .000

$ .000

$ .000

$ .000

$ .000

$ .000

$ .000

0 0 00 00

Price of

Lattes

Quantity

of Lattes

H e l e n s De m a n d S c h e d u l e & Cu r v ePrice

oflattes

Quantityof lattes

demanded

$0.0016

1.0014

2.00123.0010

4.008

5.006

6.004

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D e m a n d The quantity demanded in the market is the sum of the

quantities demanded by all buyers at each price.

Suppose Helen and Ken are the only two buyers in the Lattemarket. (Q d = quantity demanded)

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Foster 7Principles of Microeconomics

4

6

8

10

12

1416

Helens Qd

2

3

4

5

6

78

Kens Qd

+

+

++

=

=

=

=

6

9

12

15

+= 21

Market Qd

$0.00

6.00

5.00

4.00

3.00

2.00

1.00

Price

+

+

=

=

24

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$ .000

$ .000

$ .000

$ .000

$ .000

$ .000

$ .000

0 0 00 00 00 00

P

Q

T h e M a r k e t De m a n d Cu r v e fo rLa t t e s

P Qd (Market)

$0.0024

1.0021

2.0018

3.0015

4.0012

5.009

6.006

0



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Terms for Shift vs. Movement Along Curve

Change in the quantity demanded:a movement along a fixed D curve whichoccurs when P changes

Change in demand: a shift in the D curvewhen other things change (like income ornumber of buyers)

10 Foster Principles of Microeconomics 10


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De m and C u r v e Sh i f te r s :N u m b e r o f B u y e r s

An increase in the number of buyers

increases quantity demanded at eachprice, and shifts the D curve to the right;and vice versa.

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$ .000

$ .000

$ .000

$ .000

$ .000

$ .000

$ .000

0 0 00 00 00 00 00

P

Q

Suppose the number

of buyers increases.

Then, at each P,

Qd will increase

(by 5 in this example).

0De m and C u r v e Sh i f te r s :N u m b e r o f B u y e r s



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Demand for a normal good is positivelyrelated to income.

An increase in income causes an increase in

quantity demanded at each price, shifts D curveto the right.

Demand for an inferior good is negativelyrelated to income.An increase in income shifts D curves for inferior

goods to the left.

De m and C u r v e Sh i f te r s :I n c o m e

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Two goods are complements if an increase in theprice of one causes a fall in demand for the other.

Example: computers and software.If the price of computers rises, people buy fewercomputers, and therefore less software.Software demand curve shifts left.

De m and C u r v e Sh i f te r s :P r i c e s o f Re l a te d G ood s

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Anything that causes a shift in tastes towarda goodwill increase demand for that goodand shift its D curve to the right.

Example:The Atkins diet became popular in the 90s,caused an increase in demand for eggs,

shifted the egg demand curve to the right.

De m and C u r v e Sh i f te r s :Ta s t e s & P r e f e r en ce s

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Expectations affect consumers buying decisions.

Prices: If people expect home prices to

increase in the near future, they will move

quickly to purchase a new home

Income: If the economy sours and people

worry about their future job security, demand

for new autos may fall now.

De m and C u r v e Sh i f t e rs :E xpe c t a t i o n s

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Sum m a ry : Va r i a b le s t h a t In f lu en c eBu y e r s

Variable A change in this variablePrice causes a movement

along the D curve

Income shifts the D curve

Price of related goods shifts the D curve

Tastes shifts the D curve

Expectations shifts the D curve

Number of buyers shifts the D curve

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