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DemandChapter 3

“It’s easy to train an economist; teach a parrot to say supply and demand”

-Thomas Carlyle, 19th Century Historian

Wednesday, April 6, 2011

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At the end of this Section you should:

• Define and draw the demand curve• Discuss and apply the law of demand• Know the difference between demand and

quantity demanded• Evaluate and analyze properties that shift

the demand curve


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Demand Curve Defined


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• A Demand Curve is the graph of the relationship between the price of a good and the quantity demanded.


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• A Demand Curve is the graph of the relationship between the price of a good and the quantity demanded.

• Today we will construct the demand curve using, as an example, the demand for Hershey kisses (HK).


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Demand for HK


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Demand for HK• Suppose I let 5 of you purchase one Hershey

Kiss from me. I ask each of the five how much they would be willing to pay to purchase the kiss.


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• Willingness to Pay (WTP): the maximum amount the buyer will pay for a good.


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• From the responses, I will create a market demand schedule, a table representation of a demand curve.


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• From the responses, I will create a market demand schedule, a table representation of a demand curve.

• We will then use the market demand schedule as a proxy for an infinite number of buyers in the market and create the demand curve.


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Market Demand for Hershey Kisses

Price Quantity Demanded


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Market Demand for Hershey Kisses

Price Quantity Demanded

Aggregate Quantity Demanded


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To Draw a Demand Curve


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To Draw a Demand Curve• 1. Draw the graph and label the axis (P usually on Y

axis)


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axis)

Price of HK=P

Quantity of HK = QWednesday, April 6, 2011

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axis)• 2. Plot the points

Price of HK=P

Quantity of HK = QWednesday, April 6, 2011

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axis)• 2. Plot the points

Price of HK=P

Quantity of HK = Q1 2 3 4 5

$0.01

$0.26

$0.51

$0.76

$1.01


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axis)• 2. Plot the points• 3. Connect

Price of HK=P


$0.01

$0.26

$0.51

$0.76

$1.01


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axis)• 2. Plot the points• 3. Connect

Price of HK=P


$0.01

$0.26

$0.51

$0.76

$1.01Law of Demand:


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Demand vs. Quantity Demanded


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• “Demand” is the demand curve of the entire relationship between price and quantity.


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• “Demand” is the demand curve of the entire relationship between price and quantity.

• “Quantity Demanded” is the quantity specified on the X axis for a given price on the demand curve.


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Changes in Quantity Demanded


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Changes in Quantity Demanded• Endogenous variables (dependent variables) are

variables whose value depends on the value of other variables.


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• For Demand, P and Q are endogenous variables. The price and quantity demanded are dependent on the value of the other.


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• For Demand, P and Q are endogenous variables. The price and quantity demanded are dependent on the value of the other.

• If price changes, quantity demanded changes – it is a move along the demand curve.


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Shifts in the Demand Curve


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• Exogenous variables (independent variables) are variables whose value are determined outside of the system.


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• If something other than price changes (an exogenous variable changes) the demand curve will shift.


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• If something other than price changes (an exogenous variable changes) the demand curve will shift.

• A new Q will be demanded at each P.


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Exogenous Variables which Shift Demand


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• 1. Income:


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• 1. Income:– When a consumer’s income increases, people

generally spend more on all goods proportionally.


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generally spend more on all goods proportionally.• Therefore more Q is demanded at every P.


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– This is true for normal goods (a good for which demand increases as income increases). There are other types of goods. Don’t worry about those now.


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– This is true for normal goods (a good for which demand increases as income increases). There are other types of goods. Don’t worry about those now.

There is an increase in demand when …


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• 2. Consumer Preferences:


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• 2. Consumer Preferences:– Suppose a new study finds a link between HK

and baldness.


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• 2. Consumer Preferences:– Suppose a new study finds a link between HK

and baldness.• This will cause consumers to want to consume

less HK and will decrease demand.


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• 3. Population Changes:


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• 3. Population Changes:– Population growth affects demand. If there

are more people in the market, there exists more people to demand goods, therefore demand increases.


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• 3. Population Changes:– Population growth affects demand. If there

are more people in the market, there exists more people to demand goods, therefore demand increases.

– Same is true vice versa.


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• 4. Prices and Availability of Related Goods


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• 4. Prices and Availability of Related Goods– What are related goods?


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• Substitute good: a good that can be consumed in place of another good.

– Ex. Instead of eating HK, you could eat a candy bar.


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– Ex. Instead of eating HK, you could eat a candy bar.• Complement good: a good that is consumed with another

good.– Ex. HK and Marshmellows (for Smores!), Peanut butter and

Jelly, Coffee and milk


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– Ex. Instead of eating HK, you could eat a candy bar.• Complement good: a good that is consumed with another

good.– Ex. HK and Marshmellows (for Smores!), Peanut butter and

Jelly, Coffee and milk

– The demand of a good is affected by the price change of its substitutes or complements or the availability of its substitutes or complements.


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• 4a. Price of substitute goods


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• 4a. Price of substitute goods– The demand for a particular good and the

price of its substitute have a positive relationship.

• If price of the substitute increases, demand for good increases.


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• 4a. Price of substitute goods– The demand for a particular good and the

price of its substitute have a positive relationship.

• If price of the substitute increases, demand for good increases.

• If price of the substitute decreases, demand for the good decreases.


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• 4b. Price of complement goods



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• 4b. Price of complement goods – The demand for a particular good and the

price of its complement have an inverse relationship.



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• 4b. Price of complement goods – The demand for a particular good and the

price of its complement have an inverse relationship.

• If price of the complement increases, demand for the good decreases.

• If price of the complement decreases, demand for the good increases.



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For next class….

• Finish Demand Reading• Start Supply reading


powerpoint

Documents

demand curvewednesday

law of demand

market demand schedule

demandthomas carlyle

pquantity of hk

pointsprice of hk

connectprice of hk

hershey kisses hk