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DEMAND & SUPPLY

DEMAND & SUPPLY. PART 1 - DEMAND. MARKETS bring buyers & sellers together. They facilitate EXCHANGE , and may be FORMAL or INFORMAL arrangements. Each party is pursuing his or her SELF-INTEREST . Each must see a benefit or the deal is off! Exchange is voluntary.

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DEMAND & SUPPLY

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  1. DEMAND&SUPPLY PART 1 - DEMAND

  2. MARKETS bring buyers & sellers together. • They facilitate EXCHANGE, and may be • FORMAL or INFORMAL arrangements. • Each party is pursuing his or her SELF-INTEREST. Each must see a benefit or the deal is off! Exchange is voluntary. • SUPPLYrepresents the sellers’ side. • DEMAND depicts the buyers’ side. WHAT’S THE WORLD LOOK LIKE?

  3. At each PRICE(P) • HOW MUCH is purchased? (Qd) • of a CONSTANT QUALITY good • during a set TIME PERIOD • CETERIS PARIBUS (c.p.). • In other words, we’re examining how the amount you buy is affected by changes in the product’s price, with everything else held constant. DEMAND

  4. PRICE(the independent variable)can be expressed in 2 ways. • MONEY PRICE What’s on the price tag in today’s dollars. Also known as: • “absolute price” • “nominal price” • “current price” • Coke $1 Burger $2 • RELATIVE PRICE Given a fixed income, if you spend your money one way, what do you give up? Think opportunity cost! • 1 Coke = 1/2 Burger • 1 Burger = 2 Cokes

  5. P Qd This is the LAW of DEMAND! P Qd Qd is INVERSELY RELATED toP. As P falls, Qd rises; QUANTITY DEMANDEDis the dependent variable. as P rises, Qd falls, c.p.

  6. 2 Reasons Why P & QdAre Inversely Related • SUBSTITUTION EFFECT • As money price increases, a product’s relative price rises. • The product isn’t such a good value, so consumers switch and buy a substitute. • REAL INCOME EFFECT • Our ceteris paribus assumption holds your money income constant. • So, when a good’s price rises, you can’t afford to buy as much. • Purchasing power falls as price rises, and vice versa.

  7. P Qd $1 10 $2 8 $3 6 Ask consumers how many units of a product they’ll buy at different prices and you’d expect to get results like this: DEMAND This is a DEMAND SCHEDULE. Consistent with the Law of Demand, it shows Qd falling as P rises, c. p.

  8. $3 $2 $1 PRICE P Qd $1 10 $2 8 $3 6 D 0 2 4 6 8 10 QUANTITY Plot the (Qd, P) values and you have a DEMAND CURVE! P is always on the vertical axis; Q is always on the horizontal axis! DEMAND

  9. LEARN THESE! • These are the factors the c.p. assumption holds constant. Break one free and demand shifts. • $ INCOME • TASTES & PREFERENCES • POPULATION • PRICE OF RELATED GOODS • EXPECTATIONS • WEATHER The LOCK-DOWN 6

  10. P Qd $1 10 $2 8 $3 6 20 16 12 D’ D Shifts the demand curve to the RIGHT. Qd is LARGER at every Price. AN INCREASE IN DEMAND P $3 $2 $1 0 4 8 12 16 20 Q WHY? At least 1 of the Lock-Down 6 has broken loose.

  11. P Qd $1 20 $2 16 $3 12 10 8 6 D D’ Shifts the demand curve to the LEFT. Qd is SMALLER at every Price. A DECREASE IN DEMAND P $3 $2 $1 0 4 8 12 16 20 Q WHY? At least 1 of the Lock-Down 6 has broken loose.

  12. Normally, consumers buy more stuff when they have more income. Think about clothes, vacations, dinners out… When consumer income (Y) and the demand (D) for a product are positively related, we term that product a NORMAL GOOD. 1. Change in INCOME (Y) In a recession, the demand for BMWs generally decreases! • Works the other way, too, though. • Demand for NORMAL GOODS falls when consumer income falls!

  13. In contrast, there are goods we turn to in hard times because they’re all we can afford. Eggs & toast at home instead of dinner out, camping rather than a hotel . . . When consumer income (Y) and the demand (D) for a product are inversely related, we’re talking about INFERIOR GOODS. 1. Change in INCOME (Y) • As income rises, demand for INFERIOR GOODS falls and we go back to the “good stuff.”

  14. When something becomes more popular, the demand for it increases. Think about the “hot” Christmas toy! 2. A Change in TASTES & PREFERENCES • And when things go out of style, the demand for them drops. Last year’s fashions… Tape players…

  15. More people (either in the total population or in a particular demographic group) generally means higher demand for the goods/services they use. Think how the demand for everything from milk to toilet paper increases as your family grows! 3. Change in POPULATION

  16. The demand for one product can be affected by another product’s price change. When 2 goods interact this way, they’re called RELATED GOODS. SUBSTITUTES (like Coke & Pepsi) are goods which can both fill the same want. COMPLEMENTS (like hot dogs & buns) are goods you buy and use together. Let’s see how this works . . . 4. Change in a RELATED GOOD’S PRICE

  17. COKE Pepsi SUBSTITUTES can replace each other, so when the price of one goes up, consumers increase their demand for the competitor’s product - and vice versa. In other words, The Price of Good #1 & the Demand for Good #2 are positively related. The price of Pepsi and the demand for Coke move in the same direction. 4. Change in a RELATED GOOD’S PRICE

  18. COMPLEMENTS: goods used together. 4. Change in a RELATED GOOD’S PRICE • Shoppers buy more hot dogs when they go on sale. And what’s a dog without a bun? Demand for hot dog buns shifts to the right (increases). • Price of Good #1 & Demand for Good #2 are negatively related for complements. • A negative change in the hot dog price caused a positive change in demand for buns.

  19. Consumer demand is also influenced by our thoughts about the future. For example, your opinions regarding • FUTURE AVAILABILITY of GOODS • FUTURE PRICES • FUTURE INCOME can affect demand today. Let’s see how. 5. A Change inEXPECTATIONS

  20. FUTURE PRICES • If we believe prices will drop soon, we wait for the bargain. Current demand drops. (Ever wait for an after-Christmas sale?) • On the other hand, if you believe prices will rise in the future, you may stock up now to beat the price hike. Current demand rises.

  21. Optimism about future income can increase demand for normal goods even before we have any of that cash in hand! Think tax return… Afraid of being laid off? You might spend less just in case. Demand for normal goods falls; demand for inferior goods rises. That’s why economists study consumer confidence. FUTURE INCOME

  22. WEATHER • Demand for ice cream rises and falls with the temperature. • Why are sales for heavy coats slow when we have a mild winter? • The concession at Dunkin Dounutswatch the weather forecast to know whether to stock up on hot coffee or cold drinks.

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