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# What did you study last time? - PowerPoint PPT Presentation

What did you study last time?. Chapter 4 The Market Forces of Demand & Supply Introduction. What do you study now?. Chapter 4 The Market Forces of Demand & Supply Demand. Do you know …. how much of a good/service that a buyer buys? what happens when the price of the good/service changes?

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Chapter 4

The Market Forces of Demand & Supply

Introduction

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Chapter 4

The Market Forces of Demand & Supply

• Demand

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• what happens when the price of the good/service changes?

• what happens when factors other than the price of the good/service change?

• how to find market demand?

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• the price of the good/service, and

• other factors.

• Let us define:

• Qd as the quantity demanded (how much one is willing and able to buy), and

• P as the price of the good/service

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• The general demand function is written as:

Qd = f (P, other factors)

where f means a function of or depends on

• The relationship between Qd and P, with other factors assumed to be constant, is called demand (D).

Qd = f (P), other factors = constant (D)

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• Demand can be expressed as

• a schedule (table),

• a curve (graph), or

• an equation (function).

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• The law of demand

• Demand schedule (table)

• Demand curve (graph)

• Demand equation (function)

• A general demand curve

• Movement along the demand curve

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• Ceteris paribus, if price (P) falls, then quantity demanded (Qd) rises, and vice versa.

• Ceteris paribus is an assumption.

• It means that other factors are assumed to be unchanged.

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• The law of demand states that if other things being the same, people would buy less of a good if the price of the good is higher. They would buy more if the price is lower.

• Qd = f (P), ceteris paribus, so

• if P rises, Qd falls, or

• if P falls, Qd rises.

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• For example, today a person stops at a gas station for gasoline. He/she bought 10 gallons last week and paid \$3.00 for a gallon.

• If today the price is \$4.00, it is likely that he/she would buy less than 10 gallons.

• If today the price is \$2.00, it is likely that he/she would buy more than 10 gallons.

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Point

P

Qd

a

\$0.0

12

At different

prices, a

consumer

different

amounts.

b

\$0.5

10

c

\$1.0

8

d

\$1.5

6

e

\$2.0

4

f

\$2.5

2

g

\$3.0

0

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P

\$4.0

Plotting and connecting the points

in the demand schedule, we trace

out the demand (D) curve.

\$3.0

\$2.0

D

\$1.0

Q

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0

4

12

2

6

8

10

P

What is the function of the demand curve shown?

\$4.0

P = slope*Qd + VI = -1/4 Qd + 3

\$3.0

\$2.0

D

\$1.0

Q

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0

4

12

2

6

8

10

P

Ceteris paribus,

• At P1, the consumer is

• at point A, buying Q1.

if P is down, Qd is up,

A

and vice versa.

P1

2. When the price falls to P2,

the consumer is at point B,

B

3. The demand (D) curve is

the curve going through

two points A and B.

P2

D

O

Q

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Q1

Q2

f. Movement along the demand curve, or DQd, is caused by a change in price.

P

4. A change in price causes a change in quantity demanded;

this is shown as a movement along the existing demand curve.

3. DP => DQd

D

\$3.0

2. At P= \$2, the buyer is

at point e, buying 4 units.

e

\$2.0

1. At P=\$.5, the buyer is

at point b, buying 10 units.

DP

b

\$0.5

Q

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0

12

4

10

DQd

f. Movement along a demand curve = change in quantity demanded (DQd)

P

1. Suppose that consumers are at point A originally.

B

P1

A decrease in Qd

DP

2a. Then P

rises, …

A

P0

An increase in Qd

2b. or P

falls, …

DP

C

P2

D

DQd

DQd

O

Q

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Q1

Q0

Q2

3. What happens when factors other than the price of the good/service change?

• What are other factors?

• What happens when other factors change?

• Shifts (or changes) in demand

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a. What are other factors? good/service change?

• Other factors affecting (changing) demand include:

• Income/wealth

• Prices of other related goods(substitutes & complements)

• Tastes/preferences

• Expectations

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b. What happens when other factors change? good/service change?

• If the price (P) of the good/service is the same and

• any of the other factors changes,

• then at the same price (P), Qd changes,

• so demand (D) changes.

• This is shown by a shift in the entire demand curve.

• If DP = 0, D other factors => DQd = DD

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1) What happens when income/wealth changes? good/service change?

• Suppose that a consumer has more income/wealth. At the same price (P),

• he or she would buy more of normal goods, e.g. new cars, or

• he or she would buy less of inferior goods, e.g. used cars.

• Changes in income/wealth change the demand for goods/services.

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2) What happens when the prices of related goods change? good/service change?

• Suppose that a consumer plans to buy Pepsi.

• Suppose further that Coke is on sale, so Coke is cheaper compared to Pepsi.

• If either soft drink is OK with the consumer, she would likely buy Coke, instead of Pepsi.

• Pepsi and Coke are substitutes.

• The change in the price of a related good, Coke, changes the demand for another good, Pepsi.

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2) What happens when the prices of related goods change? good/service change?

• Suppose that a consumer plans to buy a big SUV and the price of gasoline increases.

• The consumer may decide to drop her plan to buy the SUV, and settle with a small compact.

• Cars and gasoline are complements. They are used together.

• The change in the price of a related good, gasoline, changes the demand for another good, SUV.

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3) What happens when tastes/preference change? good/service change?

• Suppose that a research report just came out saying that drinking wine moderately will be good for the heart.

• Many consumers will start buying wine.

• The change in tastes/preferences changes the demand for a good.

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3) What happens when expectations change? good/service change?

• Suppose that the government will impose a new tax on gasoline starting tomorrow.

• Many consumers will fill up their gas tanks TODAY.

• Expectations change the demand for a good.

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c. Shift/Change in demand ( good/service change?DD) is caused by a change in other factors

P

3. A change in other factors causes

a shift in the demand curve.

A

B

2. At the same price, a

factor changes, the

consumer is at point B

P0

DD

• At P0, a consumer

• is at point A on D0,

D1

DQd

D0

O

Q

CRC Economics

Q0

Q1

c. Shift in demand good/service change?=change in demand (DD)

P

3. A change in other

factors increases

demand, shifting

the demand curve

to the right.

• Suppose that consumers

• are at point A originally.

C

B

A

P0

Decrease in D

Increase in D

2. A change in other factors

decreases demand, shifting

the demand curve to the left.

D1

D0

D2

O

Q

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Q2

Q0

Q1

4. How to find the market demand? good/service change?

• The market demand is the horizontal summation of all individuals’ demands for a particular good or service.

• Qd(market) = S Qd(individuals) @each P

• A new factor (the number of buyers) is added to the list of other factors.

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Now you know … good/service change?

• what happens when the price of the good/service changes.

• what happens when factors other than the price of the good/service change.

• how to find the market demand.

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Summary good/service change?

• How much of a good/service that a buyer buys depends on its price and otherfactors.

• When the price of a good increases, a buyer would often buy less.

• When the price of a good decreases, a buyer would often buy more.

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Summary good/service change?

• The condition is that other factors stay unchanged.

• The change in price causes a movement along the existing demand curve.

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Summary good/service change?

• When other factors change, even at the same price, a buyer would often buy a different amount.

• The changes in other factors cause shifts in the demand curve.

• The market demand is the sum of all buyers’ demands.

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What did you study? good/service change?

Chapter 4

The Market Forces of Demand & Supply

• Demand

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What will you study next? good/service change?

Chapter 4

The Market Forces of Demand & Supply

• Supply

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See You! good/service change?

Take Care!

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