1. Define and analyze Demand
Lecture 4 Demand
Define and analyze Demand

2. Markets Coordinate Resource Allocation by
The Interaction of Demand and Supply
in determining prices

3. The Foundation of Demand
If a person demands something, they
Want it,
Can afford it, and
Have made a definite plan to buy it.
It takes more than just wanting it. 9

4. What determines buying plans?
The price of the good
The prices of related goods
Income
Population
Preferences
Expected future prices 11

5. CETERIS PARIBUS VERY IMPORTANT The concept of the quantity demanded
of a good or service is related to the price of that good or service,
CETERIS PARIBUS 10

6. What Ceteris are Paribus?
The quantity demanded
is the amount that consumers plan to buy during a given time period at a particular price.
What Ceteris are Paribus? 10

7. The prices of related goods Income Population
Everything Else
The prices of related goods
Income
Population
Preferences
Expected future prices 11

8. The Law of Demand
Ceteris Paribus, the higher the price of a good, the smaller is the quantity demanded;
And Vice Versa 12

9. Substitution Effect (opportunity cost)
WHY?
The Reasons for the Law
Substitution Effect (opportunity cost)
Income Effect (like a decrease in income) 12

10. Demand The Reasons for the Law
Substitution Effect (opportunity cost increases)
Suppose the price of a candy bar is $2, and the price of a movie increases from $4 to $8:
The opportunity cost of a movie increases from 2 to 4 candy bars! 12

11. Income Effect (buy less of something)
The Reasons for the Law
Income Effect (buy less of something)
the price of a movie increases you can
attend the same number of movies and buy less candy..
cut back on the number of movies and buy the same number of candy bars.
There are a lot of options... 12

12. Demand Schedule and Demand Curve
Demand schedules list the quantities
demanded at each different price
Demand curves are graphs of demand
schedules showing the relationship
between the quantity demanded of
a good and its price 13

13. Demand Schedule Price Quantity a 1 9 b 2 6 c 3 4 d 4 3 e 5 2
(dollars per CD) (millions of CDs per week)
a 1 9
b 2 6
c 3 4
d 4 3
e 5 2
Instructor Notes:
1) The table shows a demand schedule listing the quantity of tapes demanded at each price if all other influences on buyers’ plans remain the same.
2) At a price of $1 a tape, 9 million tapes a week are demanded; at a price of $3 a tape, 4 million tapes a week are demanded. 14

14. Demand Curve Demand Curve for CDs e d c b a 6 Price (dollar per CD) 54 c 3 b
Instructor Notes:
1) The demand curve shows the relationship between quantity demanded and price, everything else remaining the same.
2) The demand curve slopes downward: As price decreases, the quantity demanded increases.
3) The demand curve can be read in two ways. For a given price, it tells us the quantity that people plan to buy. For example, at a price of $3 a tape, the quantity demanded is 4 million tapes a week.
4) For a given quantity, the demand curve tells us the maximum price that consumers are willing and able to pay for the last tape available. For example, the maximum price that consumers will pay for the 6 millionth tape is $2. 2 a 1
Quantity (millions of CDs per week) 17

15. A Price Increase
Price P1 P0 D0 Q1 Q0
Quantity 31

16. Demand A Change in Demand (vs. change in quantity demanded)
When any factor that influences buying plans changes, other than the price of the good, there is a change in demand.
Demand 18

17. An increase in demand causes
the demand curve to
SHIFT RIGHTWARD 18

18. Price
Increase in
demand D1 D0
Quantity 35

19. A decrease in demand causes
the demand curve to
SHIFT LEFTWARD 18

20. A Change in Demand
Price
Decrease in
Demand D0 D2
Quantity 35

21. What Causes Increases and Decreases in Demand?
Not a change in a good’s price!
WHY?
Because that causes a change in
Quantity Demanded
movement along a given demand curve 11

22. Demand It’s the Other Things The prices of related goods Income
Population
Preferences
Expected future prices
Demand 11

23. Goods used in the place of another good
Price of Related Goods
Substitutes
Goods used in the place of another good
Complements Goods used in conjunction with another good 19

24. A Change in Demand
What Happens to Demand if the price of a complement good decreases? 19

25. What happens if the price of a CD player falls to $50?
Demand for CDs
(CD Player $200) 6 5
What happens if the price of a CD player falls to $50?
Price (dollar per CD) 4 3 2 1
Quantity (millions of CDs per week) 25

26. (CD Player $50) 6 Price (dollar per CD) 5 4 Demand for CDs 3 2 1
Instructor Notes:
When demand increases, the demand curve shifts rightward, as shown by the shift arrow and the resulting red curve. 1
Demand for CDs
(CD Player $50)
Quantity (millions of CDs per week) 26

27. A Change in Demand
What Happens to Demand if the price of a substitute good increases? 19

28. Demand for apples (oranges $2/kg.) 6 Price (dollar per kg) 5 4 3 2 1
Quantity (millions of kilos per week) 25

29. Demand Demand for apples (oranges $4/kg.) 6 Price (dollar per kg) 5 43 2
Instructor Notes:
When demand increases, the demand curve shifts rightward, as shown by the shift arrow and the resulting red curve. 1
Quantity (millions of kilos per week) 26

30. Demand increases as income increases
Normal Goods
Demand increases as income increases 20

31. A Change in Demand Income Inferior Goods
Demand decreases as income increases
EXAMPLES?
A Change in Demand 20

32. Inferior Good NormalGood
Price
Inferior Good
NormalGood D1 D0 D2
Quantity 35

33. A Change in Demand Population Size and age structure Preferences
Attitudes toward goods and services
Expected Future Prices
Computers?
A Change in Demand 21