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DEMAND

Micro Economics

Objectives
Enabling the students to learn about
Fundamentals of demand and supply.
Define demand with the help of demand
curve.
The movement along the demand curve
the shifts of the demand curve.
Determinants of Demand

Recap: Answer first!!!

Economic problem
Scarcity
Differentiate micro & macro
Positive & normative economics
Opportunity cost
3 big questions
Factors of production
Trade off
Model building
PPF

Demand and Supply

The basic model of supply and demand


is the workhorse of microeconomics. It
helps us to understand why and how
prices change, and what happens when
government intervenes in market.
The supply demand model combines
two important concepts: a supply curve
and demand curve. It is important to
understand precisely what these curves
represent.

Markets

A market is a group of buyers and


sellers of a particular good or
service.
The terms supply and demand
refer to the behavior of
people . . . as they interact with
one another in markets.
And Economics, especially
Microeconomics is about how
supply and demand interact in

Market Types

Goods Market
Money Market
Labour Market
Capital market

Goods Market: The markets in which


goods and services are exchanged.
Money Markets: The money market is
a component of the financial markets
for assets involved in short-term
borrowing and lending with original
maturities of one year or shorter time
frames. Trading in the money markets
involves Treasury bills , commercial
paper, bankers' acceptances.

labor market :The input/factor


market in which households
supply work for wages to firms
that demand labor.
capital market: The
input/factor market in which
households supply their
savings, for interest or for
claims to future profits, to firms
that demand funds to buy
capital goods.

Consumer

Consumer is a
broad label for
any individuals or
households that
use goods and
services
generated within
the economy.

Demand

Refers to how much (quantity)


of a product or service is
desired by buyers. The
quantity demanded is the
amount of a product people
are willing to buy at a certain
price; the relationship
between price and quantity
demanded is known as the
demand relationship.
The downward slope reflects
the relationship between price
and quantity demanded: as
price decreases, quantity
demanded increases.

The law of demand

According to the law of demand, other


things being equal, if a price of
commodity falls, the quantity demand of
it will rise, and if the price of commodity
rises, its quantity demand will decline

Utility

In economics, utility is a measure of


relative satisfaction. Given this measure,
one may speak meaningfully of
increasing or decreasing utility, and
thereby explain economic behavior in
terms of attempts to increase one's
utility.

Firms and Households: The Basic Decision-Making


Units

A firm is an organization that transforms


resources (inputs) into products
(outputs). Firms are the primary
producing units in a market economy.
An entrepreneur is a person who
organizes, manages, and assumes the
risks of a firm, taking a new idea or a
new product and turning it into a
successful business.
Households are the consuming units in
an economy.

Demand in Markets
A households decision about the
quantity of a particular output to
demand depends on:

The price of the product in


question.
The income available to the
household.

Demand in Product/Output Markets

Quantity demanded is the


amount (number of units) of a
product that a household would
buy in a given time period if it
could buy all it wanted at the
current market price.

Price and Quantity Demand: The Law of


Demand

ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS

PRICE
(PER CALL)
$
0
0.50
3.50
7.00
10.00
15.00

QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0

A demand
schedule is a
table showing
how much of a
given product a
household would
be willing to buy
at different prices.
Demand curves
are usually

Price and Quantity Demanded: The Law of


Demand
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
PRICE
(PER
CALL)
$
0
0.50
3.50
7.00
10.00
15.00

QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0

The demand curve


is a graph
illustrating how
much of a given
product a
household would
be willing to buy at
different prices.

Activity
Think about any product that you
wanted to purchase these days.
Make your table, showing increase
or decrease in prices and then
make your demand curve.

Why does the Demand Curve Slope


Downward?

Law of Demand

Inverse relationship between price and


quantity.

Law of Diminishing Marginal Utility.

Utility is the extra satisfaction that one


receives from consuming a product.
Marginal means extra.
Diminishing means decreasing.

Price and Quantity Demanded: The Law of


Demand

The law of demand


states that there is
a negative, or
inverse,
relationship
between price and
the quantity of a
good demanded
This means that
and its price.
demand curves
slope downward.

Determinants of Demand

Market price
Consumer income
Tastes
Expectations
Number of buyers and sellers
Substitutes
Complements

Factors determining
demand

1.The Tastes and Preferences of Consumers


A good for which consumers tastes and preferences
are greater, its demand would be large and its demand
curve will be at a higher level.

For example, if a celebrity endorses a new product,


this may increase the demand for a product.
Example2 On the other hand,if a new health study
comes out saying somethingis bad for your
health, this may decrease the demand for the
product.

2.Income of the people

The demand for goods also depend upon


incomes of the people.
The greater the income of the people the
greater will be their demands for goods.
When as a result of the rise in incomes
of the people, the demand increases, the
whole of the demand curve shifts
upward and vice versa

2.Income of the people

Normal goods and inferior goods.


When with increase in his income, the
consumer buys more of a good, it is
called normal good.
When with the increase in income the
consumer buys a smaller quantity of
good, it is called an inferior good.

Substitute goods

On the other hand, some goods are


considered to be substitutes for one another:
you don't consume both of them together, but
instead choose to consume one or the other.
Example: for some people Coke and Pepsi are
substitutes (as with inferior goods, what is a
substitute good for one person may not be a
substitute for another person). If the price of
Coke increases, this may make Pepsi
relatively more attractive

Complementary goods

Acomplementary goodis
agoodwhose use is related to the use
of an associated or pairedgood.
The goods which are complementary
with each other, the change in price of
any of them would affect the demand of
the other.
Tea and sugar
Car and petrol

4.The Consumer's Expectations

It doesn't just matter what is currently going on one's expectations for the futurecan also affect
how much of a product one is willing and able to
buy.
Example: if you hear that Apple will soon
introduce a new iPod that has more memory and
longer battery life, you may decide to wait to buy
an iPod until the new product comes out. When
people decide to wait, they are decreasing the
current demand for iPods because of what they
expect to happen in the future.

5.The Number of Consumers in the Market

As more or fewer consumers enter the


market this has a direct effect on the
amount of a product that consumers (in
general) are willing and able to buy.
Example: apizza shoplocated near a
University will have more demand and
thus higher sales during the fall and
spring semesters. In the summers, when
less students are taking classes, the
demand for their product will decrease
because the number of consumers in the

Shift of Demand Versus Movement Along a Demand


Curve

Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve,
from DA to DB.

A Change in Demand Versus a Change in Quantity


Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded
(Movement along the curve).
Change in income, preferences, or
prices of other goods or services
leads to
Change in demand
(Shift of curve).

The Impact of a Change in


Income
Higher income
decreases the
demand for an
inferior good

Higher income
increases the
demand for a
normal good

The Impact of a Change in the Price of Related


Goods
Demand
for
compleme
nt good
(ketchup)
shifts left
Demand
for
substitute
good
(chicken)
Price of hamburger rises
shifts right
Quantity of hamburger
demanded per month
falls

Change in Quantity Demanded


versus Change in Demand

Change in Demand

A shift in the demand curve, either


to the left or right. Caused by a
change in a determinant other than
the price.
Change in Quantity Demand
Extension in demand
Contraction in demand

Price of
Cigarettes
per Pack

$4.0
0

Changes in Quantity
Demanded
C

A tax that raises the


price of cigarettes
results in a
movement along the
demand curve.

2.00

D1
0

12

20

Number of
Cigarettes Smoked

Consumer Income
Price of
Ice-Cream
Cone

$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0

Normal Good

Increase
in demand

An
increase
in
income...

D1
0 1

2 3 4 5 6 7 8 9 10 11 12

D2
Quantity
of IceCream

Consumer Income
Price of
Ice-Cream
Cone

$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0

Inferior Good

An
increase
in
income...

Decrease
in demand

D2
0 1

D1

2 3 4 5 6 7 8 9 10 11 12

Quantity
of IceCream

What effect each of the following will have on the


demand curve for the product B? If

product B becomes more fashionable


The price of substitute product falls
A decline in income if B is an inferior
good
Consumers anticipate the price of B
will be lower in the near future
The price of complementary good D
falls
Foreign tariff barriers on B are
eliminated

From Household Demand to Market


Demand

Assuming there are only two households in the


market, market demand is derived as follows:

Activity

Take any product and make 3 demand


curves of separate households ,now
make one market demand curve for
them.

Answer please!!!

Explain law of demand.


Why does demand curve slope
downward?
What are the determinants of demand?
What happens to the demand curve
when any of these determinants
change? Explain by making curves.
Distinguish between change in demand
and change in quantity demand explain
through diagrams.