Transcript A Change in Demand

ECON107
Principles of
Microeconomics
Week 4
SEPTEMBER 2013
Chapter-3
1
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Demand
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Lesson Objectives
 Define
demand and quantity demanded
 Describe a competitive market and think
about a price as an opportunity cost
 Explain law of demand and influences of
demand
 Explain how to draw demand curve and
make demand schedule
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Demand
 Demand
indicates how much of a good
consumers are both willing and able to
buy at each possible price during a
given time period, other things constant.
If you demand something, then you
1. Want it,
2. Can afford it, and
3. Have made a definite plan to buy it.
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Quantity Demand
Wants
are the unlimited desires or
wishes people have for goods and
services. Demand reflects a decision
about which wants to satisfy.
The quantity demanded of a good or
service is the amount that consumers
plan to buy during a particular time
period, and at a particular price.
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Law of Demand
 An
inverse
relationship
exists
between price and quantity
demanded when other things
remaining the same.
As Price Falls…
…Quantity Demanded Rises
As Price Rises…
…Quantity Demanded Falls
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Law of Demand
Why
does a change in the price
change the quantity demanded?
Two reasons:
 Substitution effect
 Income effect
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Law of Demand
 Substitution Effect
When the price of a good falls, its relative price
makes consumers more willing to purchase this
good.
Alternatively, when the price of a good increases,
its relative price makes consumers less willing to
purchase this good.

For example, when the price of Al-Baik declines
while other prices remain constant, Al-Baik
becomes relatively cheaper  consumers are
more willing to purchase Al-Baik when its relative
price falls  they tend to substitute Al-Baik for
other goods.
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Law of Demand
•
Income Effect:
When the price of a good decreases, a
person’s real income increases 
increased ability to buy a good 
increase in quantity demanded.
When the price of a good increases 
real income declines  reduces the
ability to buy a good  decline in
quantity demanded
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Demand Curve and Demand Schedule
A
demand curve shows the relationship between
the quantity demanded of a good and its price
during a given period when other things are
constant.
P
$5
4
3
2
1
QD
10
20
35
55
80
DEMAND SCHEDULE
Various Amounts
A Series of Possible Prices
…a specified time period
…other things being equal
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Demand Curve and Demand Schedule
Price of Corn
P
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
4
3
2
D
1
Q
10 20 30 40 50 60 70 80Quantity of Corn
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o
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A Change in Demand
(Determinants or Factors of Demand)
 Six
main factors (determinants) that
change demand are

The prices of related goods [Substitutes
(can serve as replacements for one another)
& Complements (go together)]
Expected future prices
 Income
 Expected future income and credit
 Population
(number of buyers
consumers)
 Preferences (tastes)

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and
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A Change in Demand
(Determinants or Factors of Demand)
Changes in the prices of related goods
 For
substitutes goods, if an increase in the price
of one the demand for the other increase and
demand curve shifts to rightward and,
conversely, if a decrease in the price of one
shifts the demand for the other good leftward
(Example: Pepsi & Coca Cola)
 For complementary goods, if an increase in the
price of one shifts the demand for the other
leftward and a decrease in the price of one
shifts the demand for the other rightward (car &
petrol).
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A Change in Demand
(Determinants or Factors of Demand)
Changes in Expected Future Prices,
Income, & Credit
A
change in consumer expectations with
respect to future prices, future incomes &
credit shifts current demand
 If
individuals expect income to increase in the
future, current demand increases and demand
curve shift rightward. Vice versa also true.
 If individuals expect prices to increase in the
future, current demand increases and demand
curve shift rightward. Vice versa also true.
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A Change in Demand
(Determinants or Factors of Demand)
Changes in Consumer Income
 Normal
goods: the demand increases when
income increases and demand curve shift
rightward. The demand decreases when
income decreases and demand curve shift
leftward (example: New car).
 Inferior goods: the demand decreases when
income increases and demand curve shift
leftward. The demand increases when income
decreases and demand curve shift rightward
(example: Used car)
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A Change in Demand
(Determinants or Factors of Demand)
Changes in Preference (Taste)
A favorable change in consumer
preferences
means
If
consumer
preferences increase for a particular good
then more of this good will be demanded
at each price. Demand will increase and
demand curve will shift rightward.

An unfavorable change in consumer
preferences will decrease demand and
demand curve will shift leftward.

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A Change in Demand
(Determinants or Factors of Demand)
Changes in Population (number of
buyers or consumers)
 Increase
in the number of consumers
 increase in market demand it
means market demand curve will shift
rightward.
 Decrease in the number of consumers
 decrease in market demand it
means market demand curve will shift
leftward.
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A Change in Demand
Price of Corn
(Determinants or Factors of Demand)
P
CORN
P
$5
4
3
2
1
Increase
in Quantity
Demanded
$5
QD
10 30
20 40
35 60
55 80
80 +
4
3
2
1
o
Increase
in
Demand
D’
D
10 20 30 40 50 60 70 80
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Quantity of Corn
Q
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A Change in Demand
(Determinants or Factors of Demand)
Changes in Taste (or Preference)
 It
is nothing more than your likes and
dislikes as a consumer. Moreover, it
refers consumer preferences.
A favorable change in consumer
preferences means If consumer
preferences increase for a particular
good then more of this good will be
demanded at each price. Demand
will increase and demand curve will
shift rightward.
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A Change in Demand
(Determinants or Factors of Demand)
Changes in Taste (or Preferences)
 An
unfavorable change in consumer
preferences will decrease demand
and demand curve will shift leftward.
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Now it’s over for today. Do you
have any question?
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Dr. Mazharul Islam