Demand 002 by Nelson, a division of Thomson Canada Limited 002 by Nelson, a division of Thomson Canada Limited Supply and Supply and Demand Demand
Demand © 2002 by Nelson, a division of Thomson Canada Limited Supply and Demand.
Dec 18, 2015
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DemandDemand
©© 2002 by Nelson, a division of Thomson Canada Limited 2002 by Nelson, a division of Thomson Canada Limited©© 2002 by Nelson, a division of Thomson Canada Limited 2002 by Nelson, a division of Thomson Canada Limited
Supply and Supply and DemandDemand
Supply and Supply and DemandDemand
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 2
THE MARKET FORCES OF THE MARKET FORCES OF SUPPLY AND DEMANDSUPPLY AND DEMAND
• SupplySupply and Demand are the two words that economists use most often.
• Supply and Demand are the forces that make market economies work!
• Modern microeconomics is about supply, demand, and market equilibrium.
• SupplySupply and Demand are the two words that economists use most often.
• Supply and Demand are the forces that make market economies work!
• Modern microeconomics is about supply, demand, and market equilibrium.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 3
MARKETS AND COMPETITIONMARKETS AND COMPETITION
• The terms supply and demand refer to the behavior of people. . .
• . . .as they interact with one another in markets.
• A market is a group of buyers and sellers of a particular good or service.– Buyers determine demand...– Sellers determine supply…
• The terms supply and demand refer to the behavior of people. . .
• . . .as they interact with one another in markets.
• A market is a group of buyers and sellers of a particular good or service.– Buyers determine demand...– Sellers determine supply…
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 4
DEMANDDEMAND
• Quantity Demanded refers to the amount (quantity) of a good that buyers are willing to purchase at alternative prices for a given period.
• Quantity Demanded refers to the amount (quantity) of a good that buyers are willing to purchase at alternative prices for a given period.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 5
Determinants of DemandDeterminants of Demand
• What factors determine how much ice cream you will buy?
• What factors determine how much you will really purchase?
1) Product’s Own Price
2) Consumer Income
3) Prices of Related Goods
4) Tastes
5) Expectations
6) Number of Consumers
• What factors determine how much ice cream you will buy?
• What factors determine how much you will really purchase?
1) Product’s Own Price
2) Consumer Income
3) Prices of Related Goods
4) Tastes
5) Expectations
6) Number of Consumers
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 6
1) Price1) Price
Law of Demand
– The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.
Law of Demand
– The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 7
2) Income2) Income
• As income increases the demand for a normal good will increase.
• As income increases the demand for an inferior good will decrease.
• As income increases the demand for a normal good will increase.
• As income increases the demand for an inferior good will decrease.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 8
3) Prices of Related Goods3) Prices of Related Goods
Prices of Related Goods
– When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.
– When a fall in the price of one good increases the demand for another good, the two goods are called complements.
Prices of Related Goods
– When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.
– When a fall in the price of one good increases the demand for another good, the two goods are called complements.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 9
4) Others4) Others
• Tastes• Expectations
• Tastes• Expectations
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 10
The Demand Schedule and the The Demand Schedule and the Demand CurveDemand Curve
The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.
The demand curve is a graph of the relationship between the price of a good and the quantity demanded.
The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.
The demand curve is a graph of the relationship between the price of a good and the quantity demanded.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 11
Table 4-1: Catherine’s Demand ScheduleTable 4-1: Catherine’s Demand Schedule
03.00
22.50
42.00
61.50
81.00
100.50
120.00
Quantity of cones Demanded
Price of Ice-cream Cone ($)
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 12
Figure 4-1: Catherine’s Demand CurveFigure 4-1: Catherine’s Demand CurvePrice of Ice-Cream Cone
Quantity of Ice-Cream Cones
2 4 6 8 10 120
$3.00
2.50
2.00
1.50
1.00
0.50
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 13
Market Demand ScheduleMarket Demand Schedule
• Market demand is the sum of all individual demands at each possible price.
• Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
• Assume the ice cream market has two buyers as follows…
• Market demand is the sum of all individual demands at each possible price.
• Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
• Assume the ice cream market has two buyers as follows…
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 14
03.00
100.50
120.00
CatherinePrice of Ice-cream
Cone ($)
Table 4-2: Market demand as the Sum of Table 4-2: Market demand as the Sum of Individual DemandsIndividual Demands
+
1
6
7
Nicholas
1
22.50
42.00
61.50
81.00
2
3
4
5
4
7
10
13
16
19
Market
=
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 15
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones
D3
D1
D2
Decrease in demand
Increase in demand
Figure 4-3: Shifts in the Demand CurveFigure 4-3: Shifts in the Demand Curve
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 16
Table 4-3: The Determinants of Quantity Table 4-3: The Determinants of Quantity DemandedDemanded
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 17
Shifts in the Demand Curve Shifts in the Demand Curve versus versus Movements Along the Demand CurveMovements Along the Demand Curve
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 18
Price of Cigarettes,
per Pack.
Number of Cigarettes Smoked per Day
D2
A policy to discourage smoking shifts the demand curve to the left.
0 20
$2.00
D1
A
10
B
Figure 4-4 a): A Shifts in the Demand CurveFigure 4-4 a): A Shifts in the Demand Curve
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 19
Price of Cigarettes,
per Pack.
Number of Cigarettes Smoked per Day
0 20
$2.00
D1
A
A tax that raises the price of cigarettes results in a movements along the demand curve.
C
12
$4.00
Figure 4-4 b): A Movement Along the Figure 4-4 b): A Movement Along the Demand CurveDemand Curve
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