MECO 6303 – Business Economics

1. MECO 6303 – Business Economics Lesson Two Demand and Supply Part A The Theory of Demand

2. In this lesson we will investigate the following: • Supply and Demand • Demand • Law of Demand. • Movement of Curve vs. movement along curve. • Ceteris Paribus assumption. • Supply • Upward Sloping. • Movement of Curve vs. movement along curve. • Ceteris Paribus assumption. • Equilibrium (competitive) • Shortages and Surpluses. • Using supply and demand to predict prices and quantities and other applications MECO 6303 Business Economics Lesson Two - Part A

3. Defining Demand • Definition: The amount demanded is the amount that wouldbepurchased of a particular product at a particular price at a particular time, all other relevant things constant. • Refers to the hypothetical ability and willingness to purchase • Desire without purchasing power is irrelevant • It is all hypothetical - equi-temporal - alternative hypothetical points at the same point in time. MECO 6303 Business Economics Lesson Two - Part A

4. All Other Relevant Things Constant(the ceteris paribus conditions) • What are they? • Tastes (what does this mean?) • Income • Other related prices • Substitutes – Coke and Pepsi. • Complements – cars and gasoline. • Expectations With this in mind, let’s draw a demand curve. MECO 6303 Business Economics Lesson Two - Part A

5. Constructing a demand curveOne Individual Price Price is on the vertical axis, quantity the horizontal – the reverse of the usual mathematical convention. P1 1 2 P2 Individual demand curve Quantity Demanded 0 Q2 Q1 MECO 6303 Business Economics Lesson Two - Part A

6. From the individual to the market Price 1+ 2 + … + = n 1 + 2 1 0 Quantity demanded MECO 6303 Business Economics Lesson Two - Part A

7. The Law of Demand • What is the law? • The demand curve slopes down • When the price is lower people buy more (no less); when the price is higher people buy less (no more). Demand Curve 0 MECO 6303 Business Economics Lesson Two - Part A

8. What kind of law is this? • A combination of logic and knowledge of human nature • What is the law? • The demand curve slopes down at a higher price consumers will not buy more; at a lower price consumers will not buy less. • More simply: at a higher price consumers will buy less; at a lower price consumers will buy more • Other things constant !!! MECO 6303 Business Economics Lesson Two - Part A

9. Time is importantTime enters-in in three different ways. • No one has ever seen a demand curve – why not? • Multiple hypothetical points at a single moment in time (now) or out of “real time.” • Does this mean it does not exist? (Has anyone seen an atom?) • Demand can be a stock or a flow • Flow  quantity per period of time; apples per day; Q/t • Stock  quantity at a point of time; all the paintings of Picasso; Q • The longer the time (real time) to react the flatter the demand curve (the more “elastic” over any price range). [here we are talking about a subtly different demand curve]. MECO 6303 Business Economics Lesson Two - Part A

10. A Shift in Demand • So when something relevant changes, we have to draw another curve: for example an increase in demand may be caused by: • an increase in income • a change in (increased intensity of) tastes • an increase in the price of a substitute • a decrease in the price of a complement. MECO 6303 Business Economics Lesson Two - Part A

11. An Increase in Demand D1 D P 0 Q MECO 6303 Business Economics Lesson Two - Part A

12. It is important to keep the terminology straight. • It’s a matter of cause and effect. • A change in the amount demanded refers to a movement along a demand curve • A change in price causes a change in the amount (quantity) demanded. • A change in demand refers to a movement (shift) of the (whole) demand curve. • A change in something else (income, related prices, tastes, expectations, etc.) causes a change in both the price and the quantity demanded. End of Part A MECO 6303 Business Economics Lesson Two - Part A