Transcript Lec 2

Demand
• Quantity demanded (Qd)
• Amount of a good or service consumers are
willing & able to purchase during a given
period of time
2-1
Definitions
• Demand function
• Quantity demand as a function of the independent
variables that influence the quantity demanded
• Direct demand
• The direct relationship between the quantity demanded
and price (other independent variables held constant)
• Inverse demand
• The direct relationship between price and quantity
demanded
• Demand curve
• A graphical presentation of inverse demand
2-2
General Demand Function
• Six variables that influence Qd
• Price of good or service (P)
• Incomes of consumers (M)
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Prices of related goods & services (PR)
Taste patterns of consumers (T)
Expected future price of product (Pe)
Number of consumers in market (N)
• General demand function
Qd = f(P, M, PR, T, Pe , N)
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General Demand Function
Qd = a + bP + cM + dPR + eT + fPe + gN
• b, c, d, e, f, & g are slope parameters
• Measure effect on Qd of changing one of the
variables while holding the others constant
• Sign of parameter shows how variable is
related to Qd
• Positive sign indicates direct relationship
• Negative sign indicates inverse relationship
2-4
General Demand Function
Variable
Relation to Qd
Sign of Slope Parameter
b = Qd/P is negative
P
Inverse
M
c = Qd/M is positive
Direct for normal goods
Inverse for inferior goods c = Qd/M is negative
PR
Direct for substitutes
Inverse for complements
d = Qd/PR is positive
d = Qd/PR is negative
T
Direct
e = Qd/T is positive
Pe
Direct
f = Qd/Pe is positive
N
Direct
g = Qd/N is positive
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Direct Demand Function
• The direct demand function, or simply
demand, shows how quantity demanded,
Qd , is related to product price, P, when all
other variables are held constant
• Qd = f(P)
• Law of Demand
• Qd increases when P falls, all else constant
• Qd decreases when P rises, all else constant
• Qd/P must be negative
2-6
Direct Demand Function
Demand for Pork
Qd  f ( p, pb, pc, Y )
Qd  171  20 p  20 pb  3 pc  2 y
Qd / pb  20, q / pc  3, q / y  2
pb  4, pc  3, y  13
Qd  286  20 p
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Inverse Demand Function
• Traditionally, price (P) is plotted on the
vertical axis & quantity demanded (Qd) is
plotted on the horizontal axis
• The equation plotted is the inverse demand
function, P = f(Qd)
2-8
Inverse Demand Function
• How much consumers are willing to pay as
a function of quantity
Q  286  20 p
p  14.30  0.05Q
p / Q  .05
2-9
Graphing Demand Curves
• A point on a direct demand curve shows
either:
• Maximum amount of a good that will be
purchased for a given price
• Maximum price consumers will pay for a
specific amount of the good
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Direct Demand Function
Q  D ( p, M , PR )
Qd  3,200  10 p  .05M  24 PR
M  60,000, PR  200
Qd  1,400  10 P
Qd / M  .05
Inverse demand function
P  140-1/ 10Qd
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Demand Schedule
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A Demand Curve
(Figure 2.1)
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Graphing Demand Curves
• Change in quantity demanded
• Occurs when only price changes
• Movement along demand curve
• Change in demand
• Occurs when one of the other variables, or
determinants of demand, changes
• Demand curve shifts rightward or leftward
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Three Demand Shifts
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2-16
Shifts in Demand
(Figure 2.2)
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