Lecture 2 Demand Outline DEMAND Markets What is

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Lecture 2 Demand

Lecture 2 Demand

Outline • DEMAND – Markets – What is demand? – Law of demand •

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 2

Introduction • Demand Supply – Economic model • Designed to explain how prices are

Introduction • Demand Supply – Economic model • Designed to explain how prices are determined in certain types of markets 3

Markets • What is a market? 4

Markets • What is a market? 4

Markets • Market – A group of buyers and sellers with the potential to

Markets • Market – 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 5

Competition in Markets • Distinguish between two kinds of competition – Imperfectly competitive markets

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 Examples? 6

Using Supply and Demand • Supply and demand model – Designed to explain how

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 7

Demand – Quantity Demanded • What is demand (or quantity demanded)? 8

Demand – Quantity Demanded • What is demand (or quantity demanded)? 8

Demand – Quantity Demanded • Quantity demanded • amount of a good • all

Demand – Quantity Demanded • Quantity demanded • amount of a good • all buyers in a are willing and able to buy • At given prices • during a period of time 9

Demand – Quantity Demanded • Quantity demanded – Is Hypothetical • quantity the households

Demand – Quantity Demanded • 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 10

The Law of Demand • When the price of a good rises and everything

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 11

Demand Schedule and Demand Curve • We can illustrate the law of demand in

Demand Schedule and Demand Curve • We can illustrate the law of demand in two ways: – Demand schedule – Demand curve 12

Demand Schedule • Demand schedule • list of different quantities demanded at different prices,

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 13

The Demand Curve • Demand curve – relationship between the price of a good

The Demand Curve • 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 14

The Demand Curve – movement along the demand curve Price per Bottle When the

The Demand Curve – movement along the demand curve Price per Bottle When the price is Ghc 4. 00 per bottle, 40, 000 bottles are demanded $4. 00 A B 2. 00 At Ghc 2. 00 per bottle, 60, 000 bottles are demanded D 40, 000 60, 000 Number of Bottles per Month 15

Movements Along the Demand Curve • A change in the price of a good

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). 16

Some Terminology: Change in Quantity Demanded • “Quantity demanded” – A particular amount •

Some Terminology: Change in Quantity Demanded • “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 17

Change in Demand • “Demand” – Relationship between price and quantity demanded – Represented

Change in Demand • “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 18

The Demand Curve A Shift of the Demand Curve An increase in income shifts

The Demand Curve A Shift of the Demand Curve An increase in income shifts the demand curve for coke from D 1 to D 2 Price per Bottle At each price, more bottles are demanded after the shift $2. 00 B 60, 000 C D 1 D 2 80, 000 Number of Bottles per Month 19

Shifts of the Demand Curve • A change in any variable that affects demand—except

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) 20

Factors that Shift the Demand Curve • What are some factors that may cause

Factors that Shift the Demand Curve • What are some factors that may cause the demand curve to shift? 21

Factors that Shift the Demand Curve • What are some factors that may cause

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 22

Factors that Shift the Demand Curve 1. Income – How does income affect demand?

Factors that Shift the Demand Curve 1. Income – How does income affect demand? 23

Factors that Shift the Demand Curve 1. Income – Normal Good • – Inferior

Factors that Shift the Demand Curve 1. Income – Normal Good • – Inferior Good • • People demand more as the income rises (examples? ) 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 24

Factors that Shift the Demand Curve 2. Wealth – – Difference between income and

Factors that Shift the Demand Curve 2. Wealth – – Difference between income and wealth? How does wealth influence demand? 25

Factors that Shift the Demand Curve 2. Wealth – Total value of everything you

Factors that Shift the Demand Curve 2. 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 26

Factors that Shift the Demand Curve 3. Prices of Related Goods • Substitutes –

Factors that Shift the Demand Curve 3. 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 – Examples? • Effect of a change in price of substitute or complement on the demand for a good? 27

Factors that Shift the Demand Curve 3. Prices of Related Goods • A rise

Factors that Shift the Demand Curve 3. 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) 28

Factors that Shift the Demand Curve 4. Population – Effect of a change in

Factors that Shift the Demand Curve 4. Population – Effect of a change in population on demand? 29

Factors that Shift the Demand Curve 4. Population – An increase in population will

Factors that Shift the Demand Curve 4. Population – An increase in population will • • increase the number of buyers increase the demand (rightward shift) 30

Factors that Shift the Demand Curve 5. Expected Price – How does an expected

Factors that Shift the Demand Curve 5. Expected Price – How does an expected upwards or downwards change in price affect demand? 31

Factors that Shift the Demand Curve 5. Expected Price – An expected rise in

Factors that Shift the Demand Curve 5. Expected Price – An expected rise in price shifts the demand curve rightward (increase) – An expected fall in price shifts the demand curve leftward (decrease) 32

Factors that Shift the Demand Curve 6. Tastes/Preferences – How do consumer preferences affect

Factors that Shift the Demand Curve 6. Tastes/Preferences – How do consumer preferences affect demand? 33

Factors that Shift the Demand Curve 6. Tastes/Preferences – tastes change toward a good

Factors that Shift the Demand Curve 6. 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) 34

Changes in Quantity Demanded • The Demand Curve – A summary a) Price ↓

Changes in Quantity Demanded • The Demand Curve – A summary a) Price ↓ Move rightward along the demand curve P P B A P 2 P 1 B P 2 b) Price ↑ Move leftward along the demand curve A P 1 D D Q 1 Q 2 Q 1 Q 35

Changes in Demand • Figure 4 The Demand Curve – A summary c) The

Changes in Demand • Figure 4 The Demand Curve – A summary c) The Demand curve shifts rightward P D 2 D 1 Income or wealth ↑ Price of substitute↑ Price of complement ↓ Population ↑ Expected price ↑ Tastes shift toward good Q 36

Changes in Demand • Figure 4 The Demand Curve – A summary P d)

Changes in Demand • Figure 4 The Demand Curve – A summary P d) The Demand curve shifts leftward D 1 D 2 Income or wealth ↓ Price of substitute ↓ Price of complement ↑ Population ↓ Expected price ↓ Tastes shift away from good Q 37

Take-home exercise • Discuss and illustrate with a graph how each of the following

Take-home exercise • Discuss and illustrate with a graph how each of the following events will affect the demand quantity demanded for cocoa powder in Ghana – An inflow of about 2 million 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 38

Next Class • Supply – the supply schedule and the supply curve; – The

Next Class • Supply – 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 Supply together 39