1. 1 Module 2 Market Mechanism Demand

2. 2 demand  Understand the difference between demand and quantity demanded. ObjectivesObjectives

3. 3 demand and quantity demanded.  Understand the difference between demand and quantity demanded. law of demand,  Define and explain the law of demand, and the two reasons why a demand curve usually slopes downwards. ObjectivesObjectives

4. 4 demand quantity demanded.  Understand the difference between demand and quantity demanded. law of demand,  Define and explain the law of demand, and the two reasons why a demand curve usually slopes downwards. change in demand change in quantity demanded.  Understand the difference between a change in demand and a change in quantity demanded. ObjectivesObjectives

5. 5 demand quantity demanded.  Understand the difference between demand and quantity demanded. law of demand,  Define and explain the law of demand, and the two reasons why a demand curve usually slopes downwards. change in demand change in quantity demanded.  Understand the difference between a change in demand and a change in quantity demanded. shift.  Understand what causes demand to shift. ObjectivesObjectives

6. 6 Understand the difference between demand and quantity demanded demand curve  A demand curve shows quantities demanded by a consumer at various prices. Objective 1

7. Objective 1:... demand and quantity demanded demand curve  A demand curve shows quantities demanded by a consumer at various prices. Price per cup ($) Quantity Demanded (cups of coffee) 1.0010 2.009 3.008 4.007 5.006 6.005 7.004 8.003 9.002 10.001

8. 8  Quantity demanded particular  Quantity demanded is the amount of a product that a consumer is willing and able to purchase at a particular price. Objective 1:... demand and quantity demanded

9. 9  Quantity demanded particular  Quantity demanded is the amount of a product that a consumer is willing and able to purchase at a particular price. Objective 1:... demand and quantity demanded

10.  Quantity demanded particular  Quantity demanded is the amount of a product that a consumer is willing and able to purchase at a particular price. Objective 1:... demand and quantity demanded  Demand versus Quantity Demanded:  Demand versus Quantity Demanded: Demand refers to the entire curve while quantity demanded is associated with a point on the curve. 10

11. 11 Define and explain the law of demand … Objective 2 demand curve inverse pricequantity demanded.  A demand curve is drawn with a downward- slope to indicate an inverse (negative) relationship between price and quantity demanded.

12. 12 Define and explain the law of demand … Law of Demand pricequantity demanded  The Law of Demand states that holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase and when the price of a product rises, the quantity demanded of the product will decrease. Objective 2

13. 13 Define and explain the law of demand … Law of Demand  The Law of Demand is explained by two effects of a price change.  When the price of a good changes, there are two effects: substitution effect (i) the substitution effect of a price change, and income effect (ii) the income effect of a price change. Objective 2

14. 14 incomesubstitution  The Law of Demand is explained by the income and substitution effects of a price change. Objective 2: … the two reasons why a demand curve slopes downwards

15. 15 Law of Demand  The Law of Demand is explained by the income and substitution effects of a price change. substitution effect  The substitution effect is the change in quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. Objective 2: … the two reasons why a demand curve slopes downwards

16. 16 Law of Demand  The Law of Demand is explained by the income and substitution effects of a price change. substitution effect  The substitution effect is the change in quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. income effect  The income effect is the change in the quantity demanded of a good that results from the effect of a change in the good’s price on a consumer’s purchasing power. Objective 2: … the two reasons why a demand curve slopes downwards

17. 17 substitution effect Do Not Confuse the substitution effect of a change in the price of price change with the change in the price of a substitute a substitute good. Objective 2: … the two reasons why a demand curve slopes downwards

18. 18 substitution effect Do Not Confuse the substitution effect of a change in the price of price change with the change in the price of a substitute a substitute good. Objective 2: … the two reasons why a demand curve slopes downwards substitution effect of a price change  The substitution effect of a price change explains a movement along the curve. Specifically, we’re asking the question: Now that the price of good X has gone up, it is more expensive relative to other goods that can substitute for X and so will this “relative price effect” change the amount of X that I want to buy?

19. 19 income effect of a price change Do Not Confuse the income effect of a price change with the effect of a change in income. Objective 2…. the two reasons why a demand curve slopes downwards.

20. 20 Do Not Confuse the income effect of a price change with the effect of a change in income. The income and substitution effects of a price change are shown as a movement along the demand curve. shown as a movement along the demand curve. income effect of a price change,  The income effect of a price change, explains a movement along the curve. Specifically, we’re asking the question: Since the price of X has gone up, it essentially reduces my purchasing power and how will this affect the quantity demanded of X? Objective 2: … the two reasons why a demand curve slopes downwards

21. 21 Understand the difference between a change in quantity demanded and a change in demand change in quantity demanded price change.  A change in quantity demanded refers to a movement along a demand curve in response to a price change. Objective 3

22. Understand the difference between a change in quantity demanded and a change in demand change in quantity demanded price change.  A change in quantity demanded refers to a movement along a demand curve in response to a price change. Objective 3 A change in price causes a movement along a demand curve. 22

23. 23 change in demand shifts.  A change in demand occurs when the entire demand curve shifts. Objective 3: … a change in quantity demanded and a change in demand

24. 24 increase in demand rightward  An increase in demand is represented by a rightward shift of the demand curve. Objective 3: … a change in quantity demanded and a change in demand

25. 25 increase in demand rightward  An increase in demand is represented by a rightward shift of the demand curve. Objective 3: … a change in quantity demanded and a change in demand

26. 26 decrease in demand leftward  A decrease in demand is represented by a leftward shift of the demand curve. Objective 3: … a change in quantity demanded and a change in demand

27. 27 Understand what causes demand to shift Objective 4 price quantity demanded  The demand curve is drawn with price of the good in question on the vertical axis and the quantity demanded on the horizontal axis.  This implies price is a key determinant of the demand decision. But is price the only determinant?  No, there are many other factors that influence the demand decision.

28. 28 Understand what causes demand to shift 1. The price of the product Objective 4 Determinants of Demand include:

29. 29 Understand what causes demand to shift 1. The price of the product 2. Tastes and preferences of buyers Objective 4 Determinants of Demand include:

30. 30 Understand what causes demand to shift 1. The price of the product 2. Tastes and preferences of buyers 3. Income of buyers Objective 4 Determinants of Demand include:

31. 31 Understand what causes demand to shift 1. The price of the product 2. Tastes and preferences of buyers 3. Income of buyers 4. Price of related goods, namely, substitutes and complements Objective 4 Determinants of Demand include:

32. 32 Understand what causes demand to shift 1. The price of the product 2. Tastes and preferences of buyers 3. Income of buyers 4. Price of related goods, namely, substitutes and complements 5. Number of buyers or Population Objective 4 Determinants of Demand include:

33. 33 Understand what causes demand to shift 1. The price of the product 2. Tastes and preferences of buyers 3. Income of buyers 4. Price of related goods, namely, substitutes and complements 5. Number of buyers or Population Objective 4 6. Consumers’ expectations about the future for example, about future prices and future income Determinants of Demand include:

34. 34 Understand what causes demand to shift 1. The price of the product 2. Tastes and preferences of buyers 3. Income of buyers 4. Price of related goods, namely, substitutes and complements 5. Number of buyers or Population Objective 4 6. Consumers’ expectations about the future for example, about future prices and future income 7. Government policies that affect consumption Determinants of Demand include:

35. Understand what causes demand to shift 1. The price of the product 2. Tastes and preferences of buyers 3. Income of buyers 4. Price of related goods, namely, substitutes and complements 5. Number of buyers or Population Objective 4 6. Consumers’ expectations about the future for example, about future prices and future income 7. Government policies that affect consumption 8. Special Influences such as dating patterns, availability of subways and festive seasons Determinants of Demand include: 35

36. 36  Along a demand curve, what happens to the determinants other than the price of the good in question? changein any determinantother than price  A change in any determinant other than price causes a shift of the demand curve. Objective 4: … what causes demand to shift 1. The price of the product 2. Tastes and preferences of buyers 3. Income of buyers 4. Price of related goods, namely, substitutes and complements 5. Number of buyers or Population 6. Consumers’ expectations about the future for example, about future prices and future income 7. Government policies that affect consumption 8. Special Influences such as dating patterns, availability of subways and festive seasons Determinants of Demand include:

37.  Ceteris paribus (“all else constant”)  Ceteris paribus (“all else constant”) is the requirement that when analyzing the relationship between two variables – such as the price and quantity demanded – other variables must be held constant.  Along a demand curve, only price and quantity demanded change. All other determinants are held constant. Price and quantity demanded change along a demand curve. All other determinants are held constant constant Objective 4: … what causes demand to shift 37

38. 38 Example 1: Demand shifter – Income Suppose Janet’s income increases. How does this affect her demand for coffee? Objective 4: … what causes demand to shift

39. 39 Example 1: Demand shifter – Income Suppose Janet’s income increases. How does this affect her demand for coffee? normal  It depends on whether the good is a normal good inferior or an inferior good. Objective 4: … what causes demand to shift

40. Example 1: Demand shifter – Income Suppose Janet’s income increases. How does this affect her demand for coffee? normal  It depends on whether the good is a normal good inferior or an inferior good.  Normalincreasesrises positive  Normal goods: demand increases as income rises and decreases as income falls. In other words, there is a positive relationship between income and demand.  Examples include concert tickets and restaurant meals. Objective 4: … what causes demand to shift 40

41. Example 1: Demand shifter – Income Suppose Janet’s income increases. How does this affect her demand for coffee, assuming coffee is a normal good for Janet ? Coffee is a normal good Objective 4: … what causes demand to shift 41

42. 42 A Inferior goods:decreases rises, negative  Inferior goods: demand decreases as income rises, and increases as income falls. In other words, there is a negative relationship between income and demand.  Examples include laundromat services and bus rides. Objective 4: … what causes demand to shift Example 1: Demand shifter – Income

43. A inferior increase in incomereduce demand  If coffee is an inferior good to Janet, an increase in income leads her to reduce her demand for coffee. This is represented by a leftward shift of the demand curve. Coffee is an inferior good Objective 4: … what causes demand to shift Example 1: Demand shifter – Income 43

44. 44 A  Normal and Inferior  Normal and Inferior goods are defined in terms of the relationship between income and demand. Objective 4: … what causes demand to shift Example 1: Demand shifter – Income

45. 45 A  Normal and Inferior  Normal and Inferior goods are defined in terms of the relationship between income and demand.  The question you need to ask is: What happens to my demand for good X when my income increases or decreases? Objective 4: … what causes demand to shift Example 1: Demand shifter – Income

46. 46 A  Normal and Inferior  Normal and Inferior goods are defined in terms of the relationship between income and demand.  The question you need to ask is: What happens to my demand for good X when my income increases or decreases? qualityirrelevant  The quality of the product is irrelevant when defining a product as “normal” or “inferior”. Objective 4: … what causes demand to shift Example 1: Demand shifter – Income

47. 47 A  Normal and Inferior  Normal and Inferior goods are defined in terms of the relationship between income and demand.  The question you need to ask is: What happens to my demand for good X when my income increases or decreases? qualityirrelevant  The quality of the product is irrelevant when defining a product as “normal” or “inferior”.  A product may be normal to one person and inferior to another. Objective 4: … what causes demand to shift Example 1: Demand shifter – Income

48. 48  There are two types of goods related in consumption: substitutes and complements. Objective 4: … what causes demand to shift Example 2: Demand shifter – change in the price of a related good

49. 49  There are two types of goods related in consumption: Substitute  A Substitute in consumption is a product that is consumed in place of another. For example, coffee and tea, Coke and Pepsi. Objective 4: … what causes demand to shift Example 2: Demand shifter – change in the price of a related good

50.  There are two types of goods related in consumption: Substitute  A Substitute in consumption is a product that is consumed in place of another. For example, coffee and tea, Coke and Pepsi. Complement  A Complement in consumption is a product that is consumed together with another product, For example, bagel and cream cheese, printer and ink cartridge. Objective 4: … what causes demand to shift Example 2: Demand shifter – change in the price of a related good 50

51. 51  Suppose to Janet coffee and tea are substitutes. What happens to her demand for coffee when the price of tea falls? Objective 4: … what causes demand to shift Example 2: Demand shifter – change in the price of a related good

52.  Suppose to Janet coffee and tea are substitutes. What happens to her demand for coffee when the price of tea falls? decrease in the price of teaquantity demanded  A decrease in the price of tea causes the quantity demanded of tea to increase. Objective 4: … what causes demand to shift Example 2: Demand shifter – change in the price of a related good 52

53. 53 coffee market demand shift left.  In the coffee market, Janet’s demand decreases causing the coffee demand curve to shift left. Example 2: Demand shifter – change in the price of a related good Objective 4: … what causes demand to shift

54. coffee market demand shift left.  In the coffee market, Janet’s demand decreases causing the coffee demand curve to shift left. Example 2: Demand shifter – change in the price of a related good Objective 4: … what causes demand to shift 54

55. Definition of Substitutes in Consumption substitutes in consumption positive Two goods, C and T are substitutes in consumption if an increase in the price of good T leads to a increase in the demand for good C and a decrease in the price of good T leads to a decrease in the demand for good C. In other words, there is a positive relationship between price of good T and the demand for good C. Objective 4: … what causes demand to shift 55

56. 56 Example 3: Demand shifter - change in consumers ’ expectations about future prices  Suppose consumers expect the price of silver to fall next month. How does this affect the demand for silver today? decreases  Today, demand decreases in anticipation of lower prices in the future. Objective 4: … what causes demand to shift

57. Example 3: Demand shifter - change in consumers ’ expectations about future prices  Suppose consumers expect the price of silver to fall next month. How does this affect the demand for silver today? decreases  Today, demand decreases in anticipation of lower prices in the future. Today’s demand curve with some given set of expectations about price Today’s demand curve with a new set of expectations about price Today’sprice Objective 4: … what causes demand to shift 57

58. 58 End of Module 2 Market Mechanism - Demand song: Money Honey artist: Elvis Presley