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Lecture 2

Lecture 2. Demand. Outline. DEMAND Markets What is demand? Law of demand the demand schedule and the demand curve; Changes in quantity demanded vs. Changes in demand Determinant factors. Introduction. Demand and Supply Economic model

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Lecture 2

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  1. Lecture 2 Demand

  2. Outline • DEMAND • Markets • What is demand? • Law of demand • the demand schedule and the demand curve; • Changes in quantity demandedvs. Changes in demand • Determinant factors

  3. Introduction • Demand and Supply • Economic model • Designed to explain how prices are determined in certain types of markets

  4. Markets • What is a market?

  5. Markets • Market • A group of buyers and sellers with the potential to trade with each other • Can be defined broadly or narrowly • Microeconomics vs. macroeconomics • Geographically • The economy • A collection of individual markets • Shoes, clothes, houses, education, haircuts, etc

  6. Competition in Markets • Distinguish between two kinds of competition • Imperfectly competitive markets • Buyers/sellers can influence the price • A few large buyers or sellers • Product differentiation • Examples? • Perfectly competitive markets (or just competitive markets) • Buyers/sellers take the market price • Many small buyers and sellers • Standardized product • Examples?

  7. Using Supply and Demand • Supply and demand model • Designed to explain how prices are determined in perfectly competitive markets • To analyze a market, we need both- Supply and Demand • Focus on Demand for this class session

  8. Demand – Quantity Demanded • What is demand (or quantity demanded)?

  9. Demand – Quantity Demanded • Quantity demanded • amount of a good • all buyers in a are willing and able to buy • At given prices • during a period of time

  10. Demand – Quantity Demanded • Quantity demanded • Is Hypothetical • quantity the households are able to purchase • given the price • Depends on Price • assume other things constant • explore the relationship between price and quantity demanded

  11. The Law of Demand • When the price of a good rises and everything else remains the same, the quantity of the good demanded will fall • Ceteris paribus assumption • many variables change simultaneously • understand each variable separately • we assume “everything else remains the same” • understand how demand reacts to price

  12. Demand Schedule and Demand Curve • We can illustrate the law of demand in two ways: • Demand schedule • Demand curve

  13. Demand Schedule • Demand schedule • list of different quantities demanded at different prices, ceteris paribus

  14. The Demand Curve • Demand curve • relationship between the price of a good and the quantity demanded, ceteris paribus • Each point on the demand curve • total quantity that buyers would choose to buy at a specific price • Graphical depiction of a demand schedule • Slopes downward • Law of Demand

  15. Price per Bottle Number of Bottles per Month The Demand Curve The Demand Curve – movement along the demand curve When the price is Ghc4.00 per bottle, 40,000 bottles are demanded A At Ghc2.00 per bottle, 60,000 bottles are demanded $4.00 B 2.00 D 40,000 60,000

  16. Movements Along the Demand Curve • A change in the price of a good causes a movement along the demand curve, ceteris paribus. • a fall in price - move rightward along the demand curve (from A to B) • a rise in price - move leftward along the demand curve (from B to A).

  17. Some Terminology:Change in Quantity Demanded • “Quantity demanded” • A particular amount • buyers would choose to buy at a specific price • One point on a demand curve • Change in quantity demanded • A movement along a demand curve in response to a change in price

  18. Change in Demand • “Demand” • Relationship between price and quantity demanded • Represented by the entire demand curve • Change in demand • Shift of the demand curve • From changes in something other than price

  19. Price per Bottle D2 D1 Number of Bottles per Month The Demand Curve A Shift of the Demand Curve An increase in income shifts the demand curve for coke from D1 to D2 At each price, more bottles are demanded after the shift B C $2.00 60,000 80,000

  20. Shifts of the Demand Curve • A change in any variable that affects demand—except for the good’s price— causes the demand curve to shift. • An increase in quantity at any price • The demand curve shifts rightward (increase in demand) • A decrease in quantity at any price • The demand curve shifts leftward (decrease in demand)

  21. Factors that Shift the Demand Curve • What are some factors that may cause the demand curve to shift?

  22. Factors that Shift the Demand Curve • What are some factors that may cause the demand curve to shift? • Income • Wealth • Prices of related goods • Population changes • Expected changes in price • Tastes/ Preferences

  23. Factors that Shift the Demand Curve • Income • How does income affect demand?

  24. Factors that Shift the Demand Curve • Income • Normal Good • People demand more as the income rises (examples?) • Inferior Good • People demand less as the income rises (examples?) • A rise in income will • increase the demand for a normal good • decrease the demand for an inferior good

  25. Factors that Shift the Demand Curve • Wealth • Difference between income and wealth? • How does wealth influence demand?

  26. Factors that Shift the Demand Curve • Wealth • Total value of everything you own minus the total dollar amount you owe • An increase in wealth will • increase demand (shift rightward) for a normal good • decrease demand (shift leftward) for an inferior good

  27. Factors that Shift the Demand Curve • Prices of Related Goods • Substitutes • can be used in place of some other good • fulfills more or less the same purpose • Examples? • Complements • used together with the good we are interested in • Examples? • Effect of a change in price of substitute or complement on the demand for a good?

  28. Factors that Shift the Demand Curve • Prices of Related Goods • A rise in the price of a substitute will: • increase the demand for a good (shift the demand curve to the right) • A rise in the price of a complement will • decrease the demand for a good (shifts the demand curve to the left)

  29. Factors that Shift the Demand Curve • Population • Effect of a change in population on demand?

  30. Factors that Shift the Demand Curve • Population • An increase in population will • increase the number of buyers • increase the demand (rightward shift)

  31. Factors that Shift the Demand Curve • Expected Price • How does an expected upwards or downwards change in price affect demand?

  32. Factors that Shift the Demand Curve • Expected Price • An expected rise in price shifts the demand curve rightward (increase) • An expected fall in price shifts the demand curve leftward (decrease)

  33. Factors that Shift the Demand Curve • Tastes/Preferences • How do consumer preferences affect demand?

  34. Factors that Shift the Demand Curve • Tastes/Preferences • tastes change toward a good • demand increases (demand curve shifts right) • tastes change away from a good • demand decreases (demand curve shifts left)

  35. Changes in Quantity Demanded • The Demand Curve – A summary • Price ↓ • Move rightward along • the demand curve • Price ↑ • Move leftward along • the demand curve P P B A P2 P1 A B P1 P2 D D Q Q Q2 Q1 Q1 Q2

  36. Changes in Demand • Figure 4 The Demand Curve – A summary • The Demand curve shifts rightward P Income or wealth ↑ Price of substitute↑ Price of complement ↓ Population ↑ Expected price ↑ Tastes shift toward good D2 D1 Q

  37. Changes in Demand • Figure 4 The Demand Curve – A summary • The Demand curve shifts leftward P Income or wealth ↓ Price of substitute ↓ Price of complement ↑ Population ↓ Expected price ↓ Tastes shift away from good D1 D2 Q

  38. Take-home exercise • Discuss and illustrate with a graph how each of the following events will affect the demand and quantity demanded for cocoa powder in Ghana • An inflow of about 2million immigrants are expected in the country • There is an increase in economic growth and general income levels of citizens • The price of coffee has declined • Consumers expect that in the future, cocoa powder prices will rise • The price of cocoa powder rises

  39. Next Class • Supply • the supply schedule and the supply curve; • The law of supply • Individual vs. Market Supply • factors influencing quantity supplied; • changes in supply vs. changes in quantity supplied • Putting Demand and Supply together

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