1. Economics Chapter 8 Demand and Quantity demanded

2. Illustration Given $20, buying similar products Good A: $10 each Good B: $18 each Good C: $25 each Possible choice: Good A x 1  $10 Good A x 2  $20 Good B x 1  $18 Factors affecting quantity of purchase Income Price Price of related product Expectation of future price

3. Quantity demanded Consumption choices are limited Price = Cost of consumption Quantity of purchase = Most beneficial amount to consumer Given: Income=$20, Good A is an economic good 2 units of Good A is the best choice Quantity demanded = 2 units Definition Quantity demanded is the maximum quantity a consumer can afford and is willing to buy at a certain price

4. Want ≠ Quantity demanded Want = Desire for goods E.g. I want a plane. In reality, not everyone can afford.  Wants might not able to be satisfied & Q d is the amount we can afford and willing to buy.

5. Price and Quantity demanded If P=$20, 1 unit will be bought If P=$10, 2 units If P=$5, 4 units  P   Q d  P   Q d Good (e.g. ball pen) [Given Income=$20] PriceQuantity $201 $102 $54

6. The Law of Demand When price rises, quantity demanded decreases; when price falls, quantity demanded increases, ceteris paribus.

7. Condition of ceteris paribus Ceteris paribus Holding the other factors constant Demand related to price in normal situation only E.g. Umbrella: In normal situation:  P   Q d or  P   Q d In rainy days:  P   Q d (correct)  P   Q d (correct) Flowers Normal situation:  P   Q d or  P   Q d Valentine’s Day:  P   Q d (correct)  P   Q d (correct)

8. Concept of Full Price Full Price = Money Price + Non-money Price = Opportunity cost to get the good Money Price: Product selling price Non-money Price: Time for queuing Effort on searching information Interest payment or forgone for early consumption Bargain with sellers Etc.

9. Concept of Full Price The law of demand Full Price Quantity demanded E.g.  Speeding Punishment Money Price  (fine from $300  $450) + Non-money Price  (3 pt. deduction) ∴ Q d of speeding   Credit card late charge Money Price  (fine from $100  $250) + Non-money Price keeps unchanged ∴ Q d of late payment   No. of policemen Money Price keeps unchanged + Non-money Price  (less opportunity to be caught) ∴ Q d of thefts  More difficult exam paper Money Price keeps unchanged (same punishment) + Non-money Price  (same action, comparatively more answers to be get) ∴ Q d of cheating 

10. Price in economics Given: Coke: $10, Pepsi: $5 Money Price Exchange ratio between goods and money. P coke = $10P Pepsi = $5 Relative Price Exchange ratio between goods (i.e. the price in terms of the other good to be given up) Relative Price of a can of Coke = $10/$5 cans of Pepsi = 2 cans of Pepsi Relative Price of a can of Pepsi = $5/$10 can of Coke = 0.5 can of Coke

11. Change in prices Case 1: Coke: $20, Pepsi: $5 Money Price P coke = $20P Pepsi = $5 P coke  by 100%P Pepsi remains unchanged Relative Price Relative Price of a can of Coke = $20/$5 cans of Pepsi = 4 cans of Pepsi (Relative Price , give up more) Relative Price of a can of Pepsi = $5/$20 can of Coke = 0.25 can of Coke

12. Change in prices Case 2: Coke: $20, Pepsi: $10 Money Price P coke = $20P Pepsi = $10 P coke  100%P Pepsi  100% Relative Price Relative Price of a can of Coke = $20/$10 cans of Pepsi = 2 cans of Pepsi (Relative Price remains unchanged, give up the same) Relative Price of a can of Pepsi = $10/$20 can of Coke = 0.5 can of Coke

13. Demand The relationship between price and quantity demanded, ceteris paribus. Demand schedule Demand curve P coke ($)QdQd 24 43 62 81 Q Demand Curve

14. Q d vs. Demand Maximum quantity -affordable -willing to buy Quantity demanded at different prices P ($) Q Q d : A point at a price level A curve: All combinations 0

15. The law of demand in demand curve  P   Q d  P   Q d Demand curve is downward sloping ( Slope < 0 ) * explained by Math coordinates P coke ($) Q

16. Violations of the law of demand P ($) Q 0 Q 0 Q 0 Slope = 0 E.g. Single price product Slope = ∞ E.g. Product with limited version Slope > 0 E.g. Luxury D D D

17. Individual demand: Demand of a consumer Market demand: Demand of all consumers (Sum of individual demand) P ($)Q d of AQ d of BQ d of market 50235 40358 304711 205914 P ($) Q 0 Q 0 Q 0 + = Horizontal Summation

18. A change in Quantity demanded (∆Q d ) ∆P  ∆Q d, ceteris paribus* When P changes, ∆Q d along the demand curve P ($) Q

19. A change in Demand  Income, able and willing to spend more P ($) Q Income=$20Income=$30 PQdQd QdQd 1512 1023 534 345 D1D1 D2D2 Original demand schedule (D 1 ) New demand schedule (D 2 ) 0 Q d increases at all prices

20. A change in Demand Increase in demand: Demand curve shift rightward P ($) Q 0 0 Q Decrease in demand: Demand curve shift leftward D1D1 D2D2 D1D1 D2D2

21. Change in Q d vs. Change in Demand cause by price changes lead to change in Q d ceteris paribus movement along the demand curve cause by other factors lead to change in Q d at corresponding price level Demand curve shifts leftward or rightward P ($) 0 Q D1D1 D2D2 Q 0 D Q1Q1 Q2Q2 P2P2 P1P1

22. Factors affecting demand Income (purchasing power)  Income  purchasing power Superior goods E.g. Fashion, Red wine, Fish fin, luxurious mansion, taxi  Income  Demand P ($) 0 Q D1D1 D2D2

23. Factors affecting demand Inferior goods E.g. rice, hut, bus  Income  Demand P ($) 0 Q D1D1 D2D2

24. Factors affecting demand Price of related goods Substitutes: Goods can be replaced easily, to satisfy the same want E.g. DVD & Blu-ray Discs, MTR & Bus, Good A and Good B are substitute  P A   Q d of Good A   Demand of Good B P ($) Q 0 D Q2Q2 Q1Q1 P1P1 P2P2 Good A P ($) 0 Q D2D2 D1D1 Good B

25. Factors affecting demand Substitutes Existing Coca-Cola vs. Pepsi Samsung TV vs. Sony TV E.g. DVD & Blu-ray Discs, MTR & Bus, Emergence of new product 2G vs. 3G mobile phone NDS vs. Gameboy [ Graphs demo. ]

26. Factors affecting demand Price of related goods Complements: Goods used jointly to satisfy the same want Joint demand E.g. DC + memory card, Car + Gasoline Good A and Good B are complement  P A   Q d of Good A   Demand of Good B P ($) Q 0 D Q1Q1 Q2Q2 P2P2 P1P1 Good A P ($) 0 Q D2D2 D1D1 Good B

27. Factors affecting demand Derived demand Demand of Good X is result in demand of Good Y E.g. raw materials, labour Good X: flower, Good Y: farmer  Demand of book   Demand of wood P ($) 0 Q D2D2 D1D1 farmer P ($) 0 Q D2D2 D1D1 flower

28. Factors affecting demand Expectation ∆ Future Price:  Future price,  Demand of present consumption  Future price,  Demand of present consumption ∆Income:  Future income,  Demand of present consumption P ($) 0 Q D1D1 D2D2 ∆ Income P ($) 0 Q D2D2 D1D1 ∆ Future Price

29. Factors affecting demand Preference  Preference,  Demand E.g. advertisement, marketing strategy, academic reports… Population  Population,  Demand Others Weather, seasons, social customs, religious reasons, hygiene, legislation E.g. Smoking is prohibited indoor   Demand of cigarette

30. Question (p.18) Eats less due to  income Improves food quality Promote sales,  P of sushi  P of sushi sauce (complement)  P of hamburger (substitute)

31. Question a. State and explain the relationship between a printer and an ink cartridge. (2) b. Explain, with the help of diagram(s), how will the demand of cartridge be affected when the price of printer increases. (6)

32. Answer a. Printer and ink cartridge are complements because they are needed to be used together to satisfy the same want. b. According to the law of demand, increase in price of printer will lead to decrease in quantity demanded of printer, ceteris paribus. That is, quantity demanded of printer will change from Q 0 to Q 1 when price changes from P 0 to P 1 (fig.1). Since printer and cartridge are complements, decrease in quantity demanded of printer will lead to decrease in demand of cartridge. The demand curve of cartridge will shift leftward from D 0 to D 1 (fig.2). P ($) 0 Q D0D0 D1D1 Ink cartridge P ($) Q 0 D Q1Q1 Q0Q0 P0P0 P1P1 Printer

33. Marginal Benefit (MB) The extra benefit brought by consuming one more unit of a good. MB = Maximum willingness (price) to pay at a margin

34. The law of diminishing marginal value The more the quantity of a good one owns, the lower is one’s willingness to pay for getting one more unit of the good. Q P ($) 400 300 200 100 1234 0

35. Consumer surplus Willingness to pay = P 1 + P 2 + P 3 + P 4 + … (Q 1 ) ( Q 2 ) ( Q 3 ) ( Q 4 ) Consumer surplus = Willingness to pay – actual payment Q P ($) 0 Price D: Willingness to pay curve Actual payment Consumer Surplus

36. Consumer maximization MB ($)Actual payment ($) Consumer gain ($) (Surplus) 1st unit1000400600 2nd unit800400 3rd unit600400200 4th unit400 0 5th unit200400-200 Q P ($) 0 Price PQdQd 10001 8002 6003 4004 Max. gain Signal to gain Lose P = MB At P = MB, Consumer gain the highest surplus MB

37. When  P (P New ), - MB > P originally - signal to gain more surplus -  Qd - Until MB = P New Conclusion: To maximize the surplus, an individual will keep buying a good until his marginal willingness to pay equals the price, i.e. MB=P. Q P ($) 0 Price P = MB

38. MB (willingness to pay) curve = Demand curve Q Marginal willingness to pay ($) 400 300 200 100 1234 0 Q Price ($) 400 300 200 100 1234 0 MB curve Demand curve Derives

39. Question a) With reference to the marginal willingness to pay for a good, explain why free goods do not have prices. (3 marks) b) No one is willing to pay for free goods. Does this imply that free goods, such as air, do not have values and will not bring benefits to consumers? (2 marks)

40. According to the law of diminishing marginal values, the willingness to pay for a good will decrease when we have more of it. The quantity of a free good is sufficient to satisfy all human wants. This means our marginal willingness to pay will fall to zero; hence, no one is willing to pay a price for it. The marginal willingness to pay or the marginal benefit of a free good is zero. But the total benefit that free goods bring to consumers is not. From fig.1, the quantity demanded of free good is at Q f, where P=0. The area bounded is the consumer surplus, which is also the total value of consuming the free good. P ($) 0 Price = 0 Q QfQf