© 2003 mcgraw-hill ryerson limited demand analysis chapter 3
TRANSCRIPT
© 2003 McGraw-Hill Ryerson Limited
Demand AnalysisDemand Analysis
Chapter 3Chapter 3
© 2003 McGraw-Hill Ryerson Limited
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Think like an EconomistThink like an Economist
Teach a parrot the terms of supply and demand and you’ve got an economist.
Thomas Carlyle
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DemandDemand
Demand means a willingness and capacity to pay.
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DemandDemand
Prices are the tool by which the market coordinates individual desires.
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The Law of DemandThe Law of Demand
Quantity demanded rises as price falls, other things constant.
Quantity demanded falls as price rises, other things constant. Thus, there is an inverse relationship
between price and quantity demanded.
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The Law of DemandThe Law of Demand
What accounts for the law of demand? People tend to substitute other goods
for goods whose price has increased.
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The Demand CurveThe Demand Curve
The demand curve is the graphic representation of the relationship between price and quantity demanded.
The demand curve slopes downward and to the right. As the price goes up, the quantity
demanded goes down.
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The Demand CurveThe Demand Curve
The negative slope tells us that quantity demanded varies indirectly—in the opposite direction—with price.
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Other Things ConstantOther Things Constant
“Other things constant” in our definition of demand means that all other factors that affect the analysis are assumed to remain constant, whether they actually remain constant or not.
These factors may include changing tastes, prices of other goods, even the weather.
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D
Pri
ce (
per
uni
t)
0
Quantity demanded (per unit of time)
PA
QA
A
A Sample Demand A Sample Demand Curve, Curve,
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Shifts in Demand Shifts in Demand Versus Movements Versus Movements Along a Demand CurveAlong a Demand Curve Demand refers to a schedule of
quantities of a good that will be bought per unit of time at various prices, other things constant.
Graphically, it refers to the entire demand curve.
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Shifts in Demand Shifts in Demand Versus Movements Versus Movements Along a Demand CurveAlong a Demand Curve Quantity demanded refers to a specific
amount that will be demanded per unit of time at a specific price, other things constant.
Graphically, it refers to a specific point on the demand curve.
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Shifts in Demand Shifts in Demand Versus Movements Versus Movements Along a Demand CurveAlong a Demand Curve A movement along a demand curve is
the graphical representation of the effect of a change in price on the quantity demanded.
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Shifts in Demand Shifts in Demand Versus Movements Versus Movements Along a Demand CurveAlong a Demand Curve A shift in demand is the graphical
representation of the effect of anything other than price on demand.
The original curve will move to the right or to the left.
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Change in Quantity Change in Quantity DemandedDemanded
0D1
Change in quantity demanded(a movement along the curve)
B
Pri
ce (
per
uni
t)
Quantity demanded (per unit of time)100
$2
$1
200
A
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D0
D1
Shift in Demand Shift in Demand P
rice
(pe
r u
nit)
Quantity demanded (per unit of time)100
$2
$1
200
B A
Change in demand(a shift of the curve)
250
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Shift Factors of Shift Factors of DemandDemand Shift factors of demand are factors that
cause shifts in the demand curve to the right or left.
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Shift Factors of Shift Factors of DemandDemand Shift factors of demand include—but are
not limited to—the following: Society's income The prices of other goods Tastes Expectations Population
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Shift Factors of Shift Factors of DemandDemand A rise in income may increase demand
for goods. When the prices of substitute goods fall,
you will consume less of the good whose price has not changed.
A change in taste will change demand without a change in price.
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Shift Factors of Shift Factors of DemandDemand If you expect your income to rise, you
may consume more now. If you expect prices to fall in the future,
you may put off purchases today.
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Shift Factors of Shift Factors of DemandDemand If there is an increase in population,
demand will increase at every price With a population decrease, demand
will decrease as well
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The Demand TableThe Demand Table
The demand table assumes all the following: As price rises, quantity demanded
declines. Quantity demanded has a specific
time dimension to it.
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The Demand TableThe Demand Table
The demand table assumes all the following: All the products involved are identical
in shape, size, quality, etc. The schedule assumes that
everything else is held constant.
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From a Demand Table From a Demand Table to a Demand Curveto a Demand Curve You plot each point in the demand table
on a graph and connect the points to derive the demand curve.
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From a Demand Table From a Demand Table to a Demand Curveto a Demand Curve The demand curve graphically conveys
the same information that is on the demand table.
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From a Demand Table From a Demand Table to a Demand Curveto a Demand Curve The curve represents the maximum
price that you will pay for various quantities of a good—you will happily pay less.
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Price
per
cas
sette
(in
dolla
rs)
A Demand Curve
Quantity of cassettes demanded (per week)1 2 3 4 5 6 7 8 9 10 11 12
13
$6.00
5.00
4.00
3.00
2.00
1.00 .50
0
3.50E
D
C
BFA
From a Demand Table From a Demand Table to a Demand Curveto a Demand Curve
Price per cassette
ABCDE
A Demand Table
Cassette rentals demanded per
week
$0.50 1.002.003.004.00
98642
Demand for cassettes
G
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Individual and Market Individual and Market Demand GoodsDemand Goods A market demand curve is the
horizontal sum of all individual demand curves. This is determined by adding the
individual demand curves of all the consumers (“demanders”).
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Individual and Market Individual and Market Demand GoodsDemand Goods In reality, the sellers do not add up
individual demand curves. They estimate total market demand for
their product which becomes smooth and downward sloping curve.
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Individual and Market Individual and Market Demand GoodsDemand Goods The demand curve is downward sloping
for the following reasons: At lower prices, existing consumers
buy more. At lower prices, new consumers enter
the market.
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From Individual From Individual DemandsDemandsto a Marketto a Market
(1)Price per cassette
$.0.501.001.502.002.503.003.504.00
(2)Marie’s demand
(3)Pierre’s demand
(2)Cathy’s demand
(3)Market demand
98765432
65432100
11000000
16141197532
ABCDEFGH
Quantity of cassettes demanded per week2
Cathy Pierre Marie
D
A
C
EF
G$4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0Pr
ice p
er c
asse
tte (i
n do
llars
)
4 6 8 10 12 14 16
B
Market demand
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