MODEL OF DEMAND

The model of demand is an attempt to explain the amount demanded of any good or service. DEMAND DEFINED The amount of a good or service a consumer wants to buy, and is able to buy per unit time.
Demand slide 1

THE ³STANDARD´ MODEL OF DEMAND
The DEPENDENT variable is the amount demanded. The INDEPENDENT variables are: the good¶s own price the consumer¶s money income the prices of other goods preferences (tastes)

Demand

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YOU COULD WRITE THE MODEL THIS WAY:
The demand for tacos QD(tacos) = D(Ptacos, Income, Pspaghetti, Pbeer, tastes)

Demand

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ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENT VARIABLE AFFECT THE AMOUNT DEMANDED

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THE DEMAND CURVE
The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand. The DEPENDENT variable is the quantity demanded. The INDEPENDENT variable is the good¶s own price.
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THE LAW OF DEMAND
The Law of Demand says that a decrease in a good¶s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand. The Law of Demand says that demand curves are negatively sloped.
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A DEMAND CURVE
A demand curve must look like this, i.e., be negatively sloped.
own price

demand quantity demanded

Market for tacos
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The demand curve means:
You pick a price, such a p0, and the demand curve shows how much is demanded. own price
p0

demand
Q0

quantity demanded

Market for tacos
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What if the price of tacos were less than p0? How do you show the effect on demand?
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At a lower price, consumers want to buy more.
own price
p0 plower

demand
Q0
Demand

Q1

quantity demanded
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Market for tacos

AN IMPORTANT POINT
When drawing a demand curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis.

Demand

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Other factors affecting demand
The question here is how to show the effects of changes in income, other goods¶ prices, and tastes on demand.

Demand

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Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the good¶s own price.
own price $1/can
How does this affect the demand curve?

demand @ I = $1000 quantity of beer

Market for beer
Demand

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This is a change in demand. It shows up as a shift to the right of the original demand curve.
own price

$1/can demand @ I = $2000 demand @ I = $1000 quantity

Market for beer
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Normal and inferior goods defined
Normal good: When an increase in income causes an increase in demand. Inferior good: When an increase in income causes a decrease in demand.

Demand

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Pizza is a normal good.
own price
What¶s the effect on the demand curve for pizza if income rises to $2,000?

demand @ I = $1000 quantity

Market for pizza
Demand

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An increase in income increases demand when pizza is normal.
own price

demand @ I = $2000 demand @ I = $1000 quantity

Market for pizza
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Suppose instead that pizza was an inferior good.
own price
What¶s the effect on the demand curve for pizza if income rises to $2,000?

demand @ I = $1000 quantity

Market for pizza
Demand

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If pizza were inferior the demand would decrease as income increases. Whether a good is normal or inferior is a matter of fact, not theory.
price

demand @ I = $1000 demand @ I = $2000 quantity
Demand

Market for pizza

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Substitutes defined
Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other. Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.

Demand

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The graph shows the demand curve for spaghetti when pizzas cost $10 each.
own price What¶s the effect of an increase in the price of pizza to $15?

demand @ pizza price of $10 quantity

Market for spaghetti
Demand

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An increase in the price of pizza, a substitute for spaghetti, causes an increase in demand for spaghetti.
own price

demand @ pizza price of $15. demand @ pizza price of $10 quantity

Market for spaghetti
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Complements defined
Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. Thus, an increase in the price of pizza would decrease the demand for beer if the goods were complements.
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The graph shows the demand curve for beer when pizzas cost $10 each.
price of beer
What is the effect on the market for beer of an increase in the price of pizza to $15?

demand @ pizza price of $10

quantity

Market for beer
Demand

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When beer and pizza are complements, an increase in the price of pizza decreases the demand for beer.
price of beer

demand @ pizza price of $10 demand @ pizza price of $15. quantity

Market for beer
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The graph shows the demand curve for umbrellas on sunny days.
price of umbrellas
What¶s the effect on demand of it being a rainy day?

demand on sunny days quantity

Market for umbrellas
Demand

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This is an example of a change in tastes. Demand increases.
price of umbrellas

demand on rainy days demand on sunny days quantity

Market for umbrellas
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DEMAND SUMMARY
Demand is a function of own-price, income, prices of other goods, and tastes. The demand curve shows demand as a function of a good's own price, all else constant. Changes in own-price show up as movements along a demand curve. Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve.
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