1. Lecture 2
Demand

2. 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

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 The economy
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

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
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
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
Price of Coke (Ghc)
Quantity Demanded (bottles per month) 1
75,000 2
60,000 3
50,000 4
40,000 5
35,000

14. The Demand Curve Demand curve Each point on the 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. The Demand Curve The Demand Curve – movement along the demand curve
Number of Bottles per Month
Price per Bottle
When the price is Ghc4.00
per bottle, 40,000 bottles
are demanded A
$4.00
At Ghc2.00 per bottle,
60,000 bottles are
demanded 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
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” Change in 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. The Demand Curve A Shift of the Demand Curve
Number of Bottles per Month
Price per Bottle
An increase in income
shifts the demand curve
for coke from D1 to D2 D2 D1
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
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 A B P1 P2 B A P2 P1 D D Q1 Q2 Q Q2 Q1 Q

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 Putting Demand and Supply together
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