Lecture 2

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

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 Markets
• What is a market?

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 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
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 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?
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 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

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

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 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

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 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

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

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

Price of Coke (Ghc) Quan ty Demanded (bo les

per month)
1 75,000
2 60,000
3 50,000
4 40,000
5 35,000

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 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
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 The Demand Curve
The Demand Curve – movement along the demand curve
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
B demanded
2.00

40,000 60,000 Number of Bottles per

Month
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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).

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 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

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 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

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 The Demand Curve
A Shift of the Demand Curve
Price per An increase in income
Bottle shifts the demand curve
for coke from D1 to D2

At each price, more bottles

are demanded after the shift

B C
$2.00

D1 D2

60,000 80,000 Number of Bottles

per Month
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 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)

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

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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

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

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Factors that Shift the Demand Curve
1. 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
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Factors that Shift the Demand Curve
2. Wealth
– Difference between income and
wealth?
– How does wealth influence demand?

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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

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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?
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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)

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

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

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

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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)

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

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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)

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

A B
P1 P2

B A
P2 P1

D D

Q1 Q2 Q Q2 Q1 Q

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

c) The Demand
P curve shifts rightward

Income or wealth ↑
Price of substitute↑
Price of complement ↓
Population ↑
Expected price ↑
D2
D1 Tastes shift toward good

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

d) The Demand
P curve shifts leftward

Income or wealth ↓
Price of substitute ↓
Price of complement ↑
Population ↓
D1 Expected price ↓
D2 Tastes shift away from good

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 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
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 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 and Supply together
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