TitleDemandslide 1 MODEL OF DEMAND The model of demand is an attempt to explain the amount demanded of any good or service. DEMAND DEFINED The amount of a good or service a consumer wants to buy, and is able to buy per unit time.

TitleDemandslide 2 THE “STANDARD” MODEL OF DEMAND The DEPENDENT variable is the amount demanded. The INDEPENDENT variables are: the good’s own price the consumer’s money income the prices of other goods preferences (tastes) expectations

TitleDemandslide 3 YOU COULD WRITE THE MODEL THIS WAY: The demand for lemon-lime Q D (lemon-lime) = D(P lemon-lime, Income, P peanuts, P cola, tastes, expectations)

TitleDemandslide 4 ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENT VARIABLE AFFECT THE AMOUNT DEMANDED

TitleDemandslide 5 THE DEMAND CURVE The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand. The DEPENDENT variable is the quantity demanded. The INDEPENDENT variable is the good’s own price.

TitleDemandslide 6 THE LAW OF DEMAND The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand. The Law of Demand says that demand curves are negatively sloped.

TitleDemandslide 7 A DEMAND CURVE A demand curve must look like this, i.e., be negatively sloped. own price quantity demanded demand Market for lemon-lime

TitleDemandslide 8 The demand curve means: You pick a price, such a p 0, and the demand curve shows how much is demanded. own price quantity demanded demand p0p0 Q0Q0 Market for lemon-lime

TitleDemandslide 9 What if the price of lemon-lime were less than p 0 ? How do you show the effect on demand? Go to hidden slide

TitleDemandslide 10 At a lower price, consumers want to buy more. own price quantity demanded demand p0p0 Q0Q0 p lower Q1Q1 Market for lemon-lime

TitleDemandslide 11 AN IMPORTANT POINT When drawing a demand curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis.

TitleDemandslide 12 Other factors affecting demand The question here is how to show the effects of changes in income, other goods’ prices, and tastes on demand.

TitleDemandslide 13 Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the good’s own price. own price quantity of lemon-lime I = $1000 Market for lemon-lime How does this affect the demand curve? How does this affect the demand curve? $1/can Go to hidden slide

TitleDemandslide 14 This is a change in demand. It shows up as a shift to the right of the original demand curve. own price quantity I = $1000 Market for lemon-lime $1/can I = $2000

TitleDemandslide 15 Normal and inferior goods defined Normal good: When an increase in income causes an increase in demand. Inferior good: When an increase in income causes a decrease in demand.

TitleDemandslide 16 Lemon-lime is a normal good. own price quantity I = $1000 Market for lemon-lime What’s the effect on the demand curve for lemon-lime if income rises to $2,000? What’s the effect on the demand curve for lemon-lime if income rises to $2,000? Go to hidden slide

TitleDemandslide 17 An increase in income increases demand when lemon-lime is normal. own price quantity I = $1000 I = $2000 Market for lemon-lime

TitleDemandslide 18 Suppose instead that lemon-lime was an inferior good. own price quantity I = $1000 Market for lemon-lime What’s the effect on the demand curve for lemon-lime if income rises to $2,000? What’s the effect on the demand curve for lemon-lime if income rises to $2,000? Go to hidden slide

TitleDemandslide 19 If lemon-lime were inferior the demand would decrease as income increases. Whether a good is normal or inferior is a matter of fact, not theory. price quantity I = $1000 I = $2000 Market for lemon-lime

TitleDemandslide 20 Substitutes defined Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other. Thus, an increase in the price of cola would increase the demand for lemon-lime if the goods were substitutes.

TitleDemandslide 21 The graph shows the demand curve for lemon-lime when colas cost $1 each. own price quantity cola price of $1 Market for lemon-lime What’s the effect of an increase in the price of cola to $1.50? What’s the effect of an increase in the price of cola to $1.50? Go to hidden slide

TitleDemandslide 22 An increase in the price of cola, a substitute for lemon-lime, causes an increase in demand for lemon-lime. own price quantity cola price of $1 Market for lemon-lime cola price of $1.50

TitleDemandslide 23 Complements defined Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. Thus, an increase in the price of peanuts would decrease the demand for lemon-lime if the goods were complements.

TitleDemandslide 24 The graph shows the demand curve for lemon-lime when peanuts cost $2 each. price of lemon- lime quantity peanuts price of $2 Market for lemon-lime What is the effect on the market for lemon-lime of an increase in the price of peanuts to $3? What is the effect on the market for lemon-lime of an increase in the price of peanuts to $3? Go to hidden slide

TitleDemandslide 25 When cola and peanuts are complements, an increase in the price of peanuts decreases the demand for lemon-lime. price of lemon- lime quantity peanuts price of $2 peanuts price of $3. Market for lemon-lime

TitleDemandslide 26 The graph shows the demand curve for umbrellas on sunny days. price of umbrellas quantity demand on sunny days Market for umbrellas What’s the effect on demand of it being a rainy day? What’s the effect on demand of it being a rainy day? Go to hidden slide

TitleDemandslide 27 This is an example of a change in tastes. Demand increases. price of umbrellas quantity demand on sunny days demand on rainy days Market for umbrellas

TitleDemandslide 28 DEMAND SUMMARY Demand is a function of own-price, income, prices of other goods, and tastes. The demand curve shows demand as a function of a good's own price, all else constant. Changes in own-price show up as movements along a demand curve. Changes in income, prices of substitutes and complements, expectations, and tastes show up as shifts in the demand curve.