Transcript chapter 3 introduction to demand

Chapter 3
Introduction
to Demand
© Edco 2012. Positive Economics
The Law of Demand –
Definitions
 Demand is the number of units of goods a
consumer will buy at various prices.
 The Law of Demand states that an increase in
price leads to a decrease in quantity demanded
(P  Q ) or a decrease in price leads to an
increase in quantity demanded (P  Q ).
© Edco 2012. Positive Economics
The Law of Demand –
Definitions
 Individual demand studies the quantities of a
good that an individual consumer is prepared to
buy at each price.
 Market /aggregate demand shows the
different quantities of a good that all consumers
in the market are prepared to buy at each price.
It is derived by adding together all the individual
quantities demanded for the good.
© Edco 2012. Positive Economics
The Law of Demand –
Definitions
 A demand schedule is a table that shows the
different quantities demanded for a good at
various market prices at any given time.
 An individual demand schedule lists the
different quantities of a good that an individual
consumer is prepared to buy at each price.
© Edco 2012. Positive Economics
The Law of Demand –
Definitions
 A market/aggregate demand schedule lists
the different quantities of a good that all
consumers in the market are prepared to buy at
each price. It is derived by adding together all
the individual demand schedules for the good.
© Edco 2012. Positive Economics
Demand Curve
 A demand curve is a graph illustrating the
demand for a good at various prices at any
given time.
 At higher prices, consumers are generally willing
to purchase less than at lower prices.
 The demand curve is said to have a negative
slope – downward sloping from left to right.
Note: When drawing demand curve graphs, ensure that
each element of the graph is labelled and graduated.
© Edco 2012. Positive Economics
Other Types of Demand
 Effective demand: Consumers must be willing to
buy AND be capable of paying the price set by the
supplier.
 Consumer surplus: The benefit to consumers
due to the difference between what consumers
actually pay to consume a good and what they
would have been willing to pay rather than go
without the good.
© Edco 2012. Positive Economics
Other Types of Demand
(Continued)
 Derived demand: Derived demand occurs
when one commodity is an essential part of
another commodity and it is demanded not for
its own sake but because it is required to
manufacture another good.
 Composite demand occurs when a commodity
is required for a number of different uses, e.g.
sugar.
© Edco 2012. Positive Economics
Other Types of Demand
(Continued)
 Joint demand occurs when the demand for
one commodity is joined with the demand for
another. Ordinarily, the commodities involved
cannot be separated and in fact form a single
good or can also be called complementary
goods.
© Edco 2012. Positive Economics
Movement or Shift in
the Demand Curve
 A movement along the demand curve is caused
by a change in the price of the good itself.
 A shift in the demand curve is caused by a
change in any non-price determinant of demand,
e.g. a change in consumers’ income.
© Edco 2012. Positive Economics
The Demand Function
Dx = f (Px, Pog, Y, E, T, U, G)
 Px = the price of the good itself
 Pog = price of other goods (price of
complementary goods and price of substitute goods)
 Y = income of the consumer
 E = consumers’ expectations concerning future
prices
 T = consumer tastes or preferences
 U = unplanned factors
 G = government regulations
© Edco 2012. Positive Economics
Demand for a Good Depends on
the Price of Other Goods
 Complementary goods are goods that are
used jointly. The use of one involves the use of
the other.
 Substitute goods are goods that satisfy the
same needs and thus can be considered as
alternatives to each other. If an increase in the
price of one good leads to an increase in the
demand for another good as an alternative, then
the two goods are said to be substitute.
© Edco 2012. Positive Economics
Demand for a Good Depends
on the Price of Other Goods
(Continued)
 A normal good is a good that obeys the law of
demand and that has a positive income effect.
 An inferior good is a good with a negative
income effect. A rise in income causes less of
these goods to be demanded, while a fall in
income causes more of these goods to be
demanded.
© Edco 2012. Positive Economics
Causes for Increase
in Quantity Demanded
A decrease in the price of the good itself
An increase in the price of a substitute good
A fall in the price of a complementary good
An increase in income (if the good is normal)
Expectations of higher prices in the future or
scarcity
 A change in taste in favour of the good
 Favourable unplanned factors
 Government legislation influencing an increase in
consumption





© Edco 2012. Positive Economics
A Rightward Shift
An Increase in Demand
Price
P
D1
Q1
D2
Q2
Quantity
© Edco 2012. Positive Economics
Exceptions to the Law of Demand
 Giffen goods
 Status symbols/snob items/ostentatious
goods/goods of conspicuous consumption
 Goods influenced by consumer
expectations/speculative goods
 Goods of an addictive nature
© Edco 2012. Positive Economics
The Price Effect
The Price Effect =
Substitution + Income Effects
 If the price of a good changes, it gives rise to
both a substitution effect (i.e. more of the
cheaper good will always be bought) and an
income effect (i.e. because of the increased
purchasing power, the demand for both goods
can change).
© Edco 2012. Positive Economics
Definition of Real Income
 Real income refers to the purchasing power
(the amount of goods and services you can buy)
of your money income.
© Edco 2012. Positive Economics