Transcript Law of demand

DeMaND
IT BEGINS!!!
Is demand = want?
Recall: What is wANT???

A desire for something
WHAT IS DeMAND???
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Do you like lemon tea?
How many are you going to buy in a week?
Please copy the following table into your
notebook, and fill in according to your will.
(Think about first how much money do you have in a
week.)
Price ($/unit)
8
7
6
5
4
3
2
1
Quantity you are
willing and able to
buy in a week
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Draw a diagram using the data you’ve
input.
Label the vertical axis – Price
Label the horizontal axis – Quantity
(demanded)
Put all the points/coordinates (P, Qd) on
the graph, and link all the points and lable
the curve – D (which means this is a
demand curve)
•
DeMAND:
An entire plan of purchase of a good of a
consumer
→ The quantity of a good or service that a
consumer is willing and able to buy at
different prices over a period of time,
ceteris paribus (other things being
constant, 其他因素不變)
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Want = Desire
Demand = Desire (Want) + Ability
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Thus,

want
= demand
DeMAND/effective deMAND
Wants
+
purchasing power
Effective
demand
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Demand is a desire backed up by purchasing
power
A desired quantity and NOT necessarily the
amount actually succeed in buying
Want or demand?
Study the figures carefully
and answer the questions.
I’ve got $12. When the price of
an egg tart is $12, I’m willing and
able to buy one. At $6 per piece,
I’m willing and able to buy two.
At $3 per piece, I’m willing and
able to buy four…
I want to eat
egg tarts but I
don’t have any
money！
Ben
Joey
Want or demand?
1 Does Ben have a want or a demand
for egg tarts? Briefly explain.
• Ben has a want for egg
tarts, but no demand for
egg tarts
• Because he does not have any money,
and hence, no purchasing power
Want or demand?
2 Does Joey has a want or a
demand
for egg tarts? Briefly explain.
• Joey has a demand for egg tarts.
• Because she has the ability
to buy egg tarts at different
prices.
Assumptions

The demand curve assumes several things in
the model:
 That a competitive market exists
 That there is perfect knowledge
 That goods in the market talked about
are homogenous (no qualitative
difference)
Individual demand
→ The quantity of a good or service that
a consumer is willing and able to buy at
different prices over a period of time,
ceteris paribus (other things being
constant)
How can we show our individual demand?
Individual demand schedule (需求表)
A table which shows the overall relationship
between P and Qd of a consumer over a period of
time
This is my individual
demand schedule for
egg tarts.
Price ($)
Qd per week (Piece)
10
8
1
2
6
3
4
2
4
5
Individual demand curve (需求曲線)
A curve which illustrates the data of
an individual demand schedule
Price ($)
10 –
8–
6–
4–
2–
3
Quantity / Week
–
2
–
–
1
–
–
0
D
4
5
 An individual demand curve
Market demand
→ The quantities of a good or service that
all consumers in the market are willing and
able to buy at different prices over a period
of time, other things being constant.
→ The sum of individual demand
of all consumers
Market demand Schedule
The sum of all individual demand schedules
Suppose there are only three people in the
market of egg tarts…
Price
($)
10
8
6
4
2
Individual demand schedule
Joey’s Qd per
week (Piece)
1
2
3
4
5
+
Andy’s Qd
per week
(Piece)
2
3
4
5
6
Ben’s Qd
per week
(Piece)
+
3
4
5
6
7
Market
Demand
schedule
= 6
9
12
15
18
Market demand Curve
A curve which illustrates the data of a
market demand schedule
Price ($)
Horizontal
summation (橫向相加)
10 –
8–
2
3
4
3
4
Joey
Andy
6–
5
4–
 A market demand curve
–
–
8
–
7
–
–
6
–
–
5
–
–
4
–
–
3
–
–
2
–
–
1
–
–
0
Dm
Ben
–
2–
9 10 11 12 13 14 15 16 17 18
Quantity / Week
Law of demand
Law of demand (需求定律) asserts that
over a period of time, ceteris paribus
(other things being constant),
Price  → Quantity demanded 
Price  → Quantity demanded 
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There is a negative relationship (correlation)
between price and quantity
Translation: People buy ________ of a
commodity when its own price falls. People
buy ________ of a commodity when its own
price rises.
Is this correlation always true???
Demand curve: Downward sloping from left to right
→ A negative relationship between P and Qd
P
→ Qd
P
Price ($)
P1
→ Qd
Price ($)

P0

P0


P1
D
Q1
Q0
D
Quantity / Week
Q0
Q1
Quantity / Week
The store understand
that consumers act
according to the law
of demand.
That is, if the prices (P)
of the TV sets are
lowered, the quantities
demanded (Qd) will
increase → this helps
to increase sale.
Ceteris Paribus

The law says, under ceteris
paribus, an increase in price
(P) will lead to a decrease in
quantity demanded (Qd), vice
versa
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Ceteris Paribus – all other
things remain constant
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Why do we need Ceteris
Paribus???
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Incomes can change
Prices of other goods can
change.
Tastes can change.
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This curve is downward
sloping (from left to right)
and CONVEX!!!
Movement on the Demand Curve.
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Make sure you use proper
economic words!!!
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Contraction- moving to the left
on the demand curve.
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Extension- moving to the right
on the demand curve.
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Quantity Demanded-
Revisit the law of demand
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According to the law, P↑ → Qd↓ ,ceteris paribus,
vice versa
Price means relative price
What is RELATIVE price?
Relative price Vs Nominal price
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Nominal price - Price on the
price tag is only the
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Relative price – price in terms
of other goods
Example
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Nominal price of an orange: $2
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Nominal price of an apple: $4
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In other words, the relative price of
ONE APPLE is TWO ORANGES
1
═2
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If the nominal price of an orange ↑ to $4 and
there is no change in the price of an apple
What is the relative price of ONE APPLE?
1
═?
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The relative price of ONE APPLE is ONE
ORANGE
1
═1
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Although the prices of both apple and orange
are the SAME (= $4)
Now, relatively cheaper!
Relatively expensive!!
Thinking Time!!
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So, why is there an increase in quantity
demanded when the price of a good falls???
There are two reasons:
Income Effect
If the price of a good ↓ and your income
remains the same. This also means your
real income has increased, so you can now
buy more goods. (Your income allows you
to now buy more goods than before!!!)
Substitution Effect
Since the prices of alternative
goods (substitutes) remain
unchanged, so the good becomes
relatively more attractive. Why?
Remember
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D curve can be curved or linear (straight line)
Not necessarily touch the axes
Negatively sloped from left to right (unless
illustration of special cases)
Qd ≠Demand
Willingness reflects the preferences
Ability reflects the income constraints
consumers confront
Answer the following questions in your notebook:
Q1. Does demand increases as price decreases?
When the price of Gold Shark
Chocolate decreases, people’s
demand for it will increase.
Joey has mixed up the
concepts of demand and
quantity demanded…
Dr.E
Joey
Q2. What is the cause-effect relationship in the law
of demand?
The law of demand states that
a decrease in the Qd for a
good will result in an increase
in its price over a period of
time, and vice versa, other
things being constant.
Andy
Andy, you have
taken cause for effect…
Dr.E
Q3. Why should the ceteris paribus condition be held in
the law of demand?
We need not assume other
factors being constant when
applying the law of demand.
Ben
Ben, you are
wrong…
Q1. Does demand increases as price decreases?
When the price of Gold Shark
Chocolate decreases, people’s
demand for it will increase.
Joey has mixed up the
concepts of demand and
quantity demanded…
Dr.E
Joey
• Demand：
→ The entire plan of purchase of a consumer
→ The quantities of a good or service that a
consumer is willing and able to buy at different
prices over a period of time, other things being
constant.
• Quantity demanded：
→ The quantity of a good or service that a
consumer is willing and able to buy at a given
price over a period of time, other things being
constant.
• The law of demand
→ other things being constant,
a decrease in price
→ an increase in quantity
demanded
Q2. What is the cause-effect relationship in the law
of demand?
The law of demand states that
a decrease in the Qd for a
good will result in an increase
in its price over a period of
time, and vice versa, other
things being constant.
Andy
Andy, you have
taken cause for effect…
Dr.E
• The law of demand:
An increase in the price of a good will
result in a decrease in Qd over a period
of time, and vice versa, other things
being constant.
• Price changes → Qd changes
• Cause: A change in price
• Effect: A change in Qd
Q3. Why should the ceteris paribus condition be held in
the law of demand?
We need not assume other
factors being constant when
applying the law of demand.
Ben
Ben, you are
wrong…
• Applying the law of demand
→ Identify clearly the relationship between the
price and Qd of a good
• If the ceteris paribus condition
does not hold,
→ we cannot analyze how a
price change affects the Qd
What is trying to be said??