Individual Markets

Demand

INDIVIDUAL MARKETS

MARKETS

• A market is an institution or mechanism that brings together buyers and sellers of goods, services, or resources for the purpose of exchange.

• www.tse.com and www.nyse.com are key markets to exchange investment securities.

• In this chapter we will focus on large markets consisting of many buyers and sellers of standardized products for which there is competition.

DEMAND: THE NATURE OF WANTS

• Demand is a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a set time.

• We say ABLE and WILLING because even though you might be willing to buy a good, it does not effect the market unless you have the resources to obtain it.

• On the right is a demand schedule for soda. For each price, there is a certain “quantity demanded.”

• Should the price reach this level, the associated quantities would be demanded: people would be Able and Willing to buy it.

• Clearly, as the price declines, consumers are able and willing to buy more soda.

A MARKET DEMAND SCHEDULE

THE LAW OF DEMAND

• The principle that, other things being equal, an increase in a product’s price will reduce the quantity of it that is demanded; and conversely for a decrease In price.

• There is an inverse relationship between price and quantity demanded.

• It is important that other things remain equal as a price increase in Coca-Cola may not result in a decline in quantity demanded if Pepsi ALSO rises in price.

WHY IS THERE AN INVERSE RELATIONSHIP?

• Diminishing Marginal Utility: You derive less satisfaction from each successive unit of a good or service consumed. The price has to be reduced for you to keep consuming at a given time.

• The Income Effect: A change in the price of a product changes a consumer’s real income (purchasing power) and thus the quantity of the product purchased. In other words, you are richer if a price drops and vice versa.

• The Substitution Effect: Things become a better or worse “deal.” When the price of one good goes up or down, you consider buying substitutes, and thus demand more or less.

• Illustrates the inverse relationship between the quantity demanded of a good or service and its price, other things being equal.

• The downward slope represents the Law of Demand – a higher quantity is demanded if the price falls.

A DEMAND CURVE

• We simply have to add up the quantities demanded for each good or service at each price by all individuals.

• The diagram to the right illustrates this exercise for a market with ten people.

• A demand curve would be a curve illustrating these points, with quantity demanded on the x axis and price on the y axis.

CONSTRUCTING MARKET DEMAND

THE DETERMINANTS OF DEMAND

• In constructing a demand curve, we assume that factors besides price are held constant (“other things being equal”). However, other things do influence demand.

• The basic determinants of demand are:

1. Consumer Tastes or Preferences

2. The Number of Consumers in the Market

3. Consumer Incomes

4. The Prices of Related Goods

5. Consumer Expectations about Future Prices and Incomes

CHANGE IN “DEMAND” VERSUS CHANGE IN “QUANTITY DEMANDED”

• When the price changes, you saw that we moved along the demand curve, which indicates a corresponding change in the Quantity Demanded.

• When there is a change in one of the Determinants of Demand, the curve actually shifts! This is what we mean by a change in Demand.

• When there is a change in Demand, consumers actually change their desired quantities at ALL prices. The whole schedule changes.

A CHANGE IN QUANTITY DEMANDED• A “movement” denotes a change in

both price and quantity demanded from one point to another on the curve.

• The movement implies that the demand relationship remains consistent.

• Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. It is caused ONLY by a change in price.

• A shift in demand occurs when a good's quantity demanded changes even though price remains the same!

• Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demanded is affected by a factor other than price.

• The factors other than price are the Determinants of Demand.

A CHANGE IN DEMAND

1. Tastes and Preferences:

• A favourable change in tastes for a product means more of it will be desired at each price (the curve shifts right).

• Styles and fads are related to changes in tastes, as are rises in health concerns.

• Advertising influences consumer tastes and preferences. The presence of a well-developed brand shifts the demand curve for a good to the right.

THE DETERMINANTS OF DEMAND CONTINUED…

2. THE NUMBERS OF BUYERS

• Population increases create more consumers, who demand higher quantities of goods at each price.

• A rise in the birth-rate or number of babies would increase the demand for baby toys, and shift the curve to the left.

3. CONSUMER INCOMES

• For most goods, increases in income increases demand… but it is not always that clear.

• For Normal Goods – demand has a positive relationship with incomes. Higher incomes would mean people demand more new clothing.

• For Inferior Goods – demand has a negative relationship with incomes. Higher incomes mean less is demanded. Demand for used clothing would decline.

4. PRICES OF RELATED GOODS

• Substitutes: Products or services that can be used in place of each other. They do not have to be identical. An increase in taxi-cab prices increases demand for bus passes.

• Complements: Products and services that are used together. A decline in the price of I-Pods increases demand for I-Pod headphones.

• Unrelated Goods: Independent goods are not related to each other, and the consumer does not compare them. Golf balls and turnips for example do not influence each other.

5. CONSUMER EXPECTATIONS ABOUT FUTURE PRICES AND INCOMES

• Higher expectations of future prices may cause demand to increase now, and vice versa. People like to beat anticipated price rises, or wait for prices to go down.

• Changes in expectations about future availability may increase demand. If you expect a shortage, you buy more now.

• Changes in expectations about future income may increase or reduce demand. If you expect a raise, you might demand more now. If you expect a lay-off, you might save.

ASSIGNMENT QUESTIONS

• Complete Numbers 1, 2 and 3. Page 71.