The Market Force
Force-- Demand
Look for the answers to these
questions
ti
• What factors affect buyers’ demand for goods?
• What
Wh t factors
f t affect
ff t sellers’
ll ’ supply
l off goods?
d?
• How do supply and demand determine the
price of a good and the quantity sold?
• How do changes in the factors that affect
pp y affect the market p
demand or supply price and
quantity of a good?
• How do
d markets
k allocate
ll resources??
Market and Demand
• A market is a group of buyers and sellers of a
particular product
• The quantity demanded of any good is the
amount of the good that buyers are willing
and able to purchase.
• Law of demand: the claim that the quantity
demanded of a good falls when the price of
the good rises, other things equal
The Demand Schedule
• Demand schedule:
a table that shows the Price
Quantity
Q tit
of
relationship between the demanded
coffee
price of a good and the
quantity demanded $0.00 16
1 00
1.00 14
• Example:
2.00 12
Helen’ss demand for coffee.
Helen
3.00 10
• Notice that Helen’s 4.00 8
preferences obey the 5.00 6
law of demand. 6.00 4
Helen’s Demand Schedule & Curve
Price of
Price Quantity
coffee
demanded
$6.00
$0.00 16
$5 00
$5.00 1.00 14
$4.00 2.00 12
$3.00 3.00 10
$2 00
$2.00 4 00
4.00 8
5.00 6
$1.00
6.00 4
$0.00
Quantity
0 5 10 15
Demand curve is the graph of the relationship between the price of a good and the
quantity demanded
Market Demand versus Individual Demand
• The quantity demanded in the market is the sum of the
quantities demanded by all buyers at each price.
• Suppose Helen and Ben are the only two buyers in the
coffee market. ((Qd = q
quantityy demanded))
Price Helen’s Qd Ben’s Qd Market Qd
$
$0.00 16 + 8 = 24
1.00 14 + 7 = 21
2.00 12 + 6 = 18
3.00 10 + 5 = 15
4.00 8 + 4 = 12
5 00
5.00 6 + 3 = 9
6.00 4 + 2 = 6
The Market Demand Curve for coffee
Qd
P P
(Market)
$6.00
$0.00 24
$5 00
$5.00
1.00 21
$4.00 2.00 18
$3.00 3.00 15
4.00 12
$2 00
$2.00
5.00 9
$1.00
6 00
6.00 6
$0.00 Q
0 5 10 15 20 25
Demand Curve Shifters
• The demand curve shows how price affects
quantityy demanded, other things
q g being g equal.
q
• These “other things” are non‐price
determinants of demand (i.e.,
(i e things that
determine buyers’ demand for a good, other
than
h the
h good’s ’ price).
)
• Changes in them shift the D curve…
Demand Curve Shifters: # of Buyers
• Increase in # of buyers
increases qquantityy demanded at each price,
p
shifts D curve to the right.
Demand Curve Shifters: # of Buyers
y
P Suppose
pp the number
$6.00 of buyers increases.
$5 00
$5.00 Then, at each P,
Qd will increase
$4.00 (by 5 in this example).
$3.00
$2 00
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
Demand Curve Shifters: Income
• Demand for a normal good is positively
related to income.
– Increase in income causes
increase in quantity demanded at each price,
price
shifts D curve to the right.
(Demand for an inferior good is negatively
related to income
income. An increase in income
shifts D curves for inferior goods to the left.)
Demand Curve Shifters: Prices of
Related Goods
• Two goods are substitutes if
an increase in the price of one
causes an increase in demand for the other.
• Example :
Coke
C k andd Pepsi,
P i
laptops and desktop computers,
CDs and music downloads
An increase in the price of one
increases demand for the other
other,
shifting demand curve to the right for the other
commodity.
Demand Curve Shifters: Prices of
Related Goods
• Two goods are complements if
an increase in the price of one
causes a fall in demand for the other.
• Example: computers and software.
If price
i off computers
t rises,
i
people buy fewer computers,
and therefore less software
software.
Software demand curve shifts left.
• Other examples?
Demand Curve Shifters: Tastes
• Anything that causes a shift in tastes toward a good will
increase demand for that good
andd shift
hif its
i D curve to the
h right.
i h
• Example:
a pe
The Atkins diet became popular in the ’90s,
caused an increase in demand for eggs,
gg ,
shifted the egg demand curve to the right.
Demand Curve Shifters: Expectations
• Expectations
i affect
ff consumers’’ buying
b i
decisions.
• Examples:
– If people
l expectt their
th i incomes
i to
t rise,
i
their demand for meals at expensive restaurants
may increase now.
now
– If the economy sours and people worry about
their future job security, demand for new autos
may fall now.
Summary: Variables That Influence Buyers
Variable A change in this variable…
Price …causes a movement
along
g the D curve
# of buyers …shifts the D curve
Income …shifts the D curve
Price of
related goods …shifts the D curve
Tastes …shifts the D curve
Expectations …shifts
shifts the D curve
ACTIVE LEARNING
D
Demand
d curve
Draw a demand curve for music downloads
downloads.
What happens to it in each of
the following scenarios? Why?
A. The price of iPods
falls
B. The price of music
downloads falls
C The
C. Th price
i off CD
CDs ffalls
ll
©Enyezdi/[Link]
ACTIVE LEARNING
A Price
A. P i off iPods
iP d falls
f ll
Music downloads
Price
P i off and iPods are
music
down- complements.
loads A fall in price of
iPods shifts the
P1 demand curve for
music downloads
to the right.
D1 D2
Q1 Q2 Quantity of
music
i ddownloads
l d
ACTIVE LEARNING
B Price
B. P i off music
i downloads
d l d falls
f ll
Price
P i off
music The D curve
down- does not shift.
loads
Move down along
P1 curve to a point with
lower P, higher Q.
P2
D1
Q1 Q2 Quantity of
music
i ddownloads
l d
ACTIVE LEARNING
C Price
C. P i off CD
CDs falls
f ll
Price
P i off CDs and
music music downloads
down- are substitutes
substitutes.
loads
A fall in price of CDs
P1 shifts demand for
music downloads
to the left
left.
D2 D1
Q2 Q1 Quantity of
music
i ddownloads
l d