Transcript File

Economics
Chapter 8
Demand and Quantity demanded
Illustration
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Given $20, buying similar products
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Possible choice:
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Good A: $10 each
Good B: $18 each
Good C: $25 each
Good A x 1  $10
Good A x 2  $20
Good B x 1  $18
Factors affecting quantity of purchase
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Income
Price
Price of related product
Expectation of future price
Quantity demanded
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Consumption choices are limited
Price = Cost of consumption
Quantity of purchase = Most beneficial amount to
consumer
Given: Income=$20, Good A is an economic good
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2 units of Good A is the best choice
Quantity demanded = 2 units
Definition
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Quantity demanded is the maximum quantity a consumer can
afford and is willing to buy at a certain price
Want ≠ Quantity demanded
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Want = Desire for goods
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E.g. I want a plane.
In reality, not everyone can afford.
Wants might not able to be satisfied
& Qd is the amount we can afford and willing
to buy.
Price and Quantity demanded
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If P=$20, 1 unit will be
bought
If P=$10, 2 units
If P=$5, 4 units
P  Qd
P   Qd
Good (e.g. ball pen)
[Given Income=$20]
Price
Quantity
$20
1
$10
2
$5
4
The Law of Demand
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When price rises, quantity demanded
decreases; when price falls, quantity
demanded increases, ceteris paribus.
Condition of ceteris paribus
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Ceteris paribus
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Holding the other factors constant
Demand related to price in normal situation only
E.g.
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Umbrella:
 In normal situation: P   Qd or P  Qd
 In rainy days: P  Qd (correct)
P  Qd (correct)
Flowers
 Normal situation: P   Qd or P  Qd
 Valentine’s Day: P  Qd (correct)
P  Qd (correct)
Concept of Full Price
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Full Price = Money Price + Non-money Price
= Opportunity cost to get the good
Money Price: Product selling price
Non-money Price:
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Time for queuing
Effort on searching information
Interest payment or forgone for early consumption
Bargain with sellers
Etc.
Concept of Full Price
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The law of demand
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Full Price
Quantity demanded
E.g.
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Speeding Punishment
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Money Price  (fine from $300 $450) + Non-money Price  (3 pt. deduction)
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∴ Qd of speeding 
Credit card late charge
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Money Price  (fine from $100 $250) + Non-money Price keeps unchanged
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∴ Qd of late payment 
No. of policemen
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Money Price keeps unchanged + Non-money Price  (less opportunity to be caught)
∴ Qd of thefts 
More difficult exam paper
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Money Price keeps unchanged (same punishment) + Non-money Price  (same
action, comparatively more answers to be get)
∴ Qd of cheating 
Price in economics
Given: Coke: $10, Pepsi: $5
 Money Price
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Exchange ratio between goods and money.
Pcoke = $10
PPepsi = $5
Relative Price
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Exchange ratio between goods (i.e. the price in terms of
the other good to be given up)
Relative Price of a can of Coke = $10/$5 cans of Pepsi
= 2 cans of Pepsi
Relative Price of a can of Pepsi = $5/$10 can of Coke
= 0.5 can of Coke
Change in prices
Case 1: Coke: $20, Pepsi: $5
 Money Price
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Pcoke = $20
Pcoke  by 100%
PPepsi = $5
PPepsi remains unchanged
Relative Price
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Relative Price of a can of Coke = $20/$5 cans of Pepsi
= 4 cans of Pepsi
(Relative Price , give up more)
Relative Price of a can of Pepsi = $5/$20 can of Coke
= 0.25 can of Coke
Change in prices
Case 2: Coke: $20, Pepsi: $10
 Money Price
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Pcoke = $20
Pcoke 100%
PPepsi = $10
PPepsi 100%
Relative Price
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Relative Price of a can of Coke = $20/$10 cans of Pepsi
= 2 cans of Pepsi
(Relative Price remains unchanged, give up the same)
Relative Price of a can of Pepsi = $10/$20 can of Coke
= 0.5 can of Coke
Demand
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The relationship between price and quantity
demanded, ceteris paribus.
Demand schedule
Demand curve
Pcoke ($)
Pcoke ($) Qd
2
4
4
3
6
2
8
1
Demand Curve
Q
Qd vs. Demand
Maximum quantity
- affordable
- willing to buy
Quantity demanded
at different prices
P ($)
Qd: A point at a price level
A curve: All combinations
0
Q
The law of demand in demand curve
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P  Qd
P   Qd
Demand curve is
downward sloping
( Slope < 0 ) *
Pcoke ($)
explained by Math coordinates
Q
Violations of the law of demand
P ($)
P ($)
P ($)
D
D
D
0
Q
Slope = 0
E.g. Single price product
0
Q
Slope = ∞
E.g. Product with limited version
Q
0
Slope > 0
E.g. Luxury
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Individual demand: Demand of a consumer
Market demand: Demand of all consumers
(Sum of individual demand)
P ($)
Qd of A
Qd of B
Qd of
market
50
2
3
5
40
3
5
8
30
4
7
11
20
5
9
14
P ($)
P ($)
P ($)
+
0
Q
=
0
Horizontal Summation
Q
0
Q
A change in Quantity demanded (∆Qd )
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∆P  ∆Qd , ceteris paribus*
P ($)
Q
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When P changes, ∆Qd along the demand curve
A change in Demand
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 Income, able and willing to spend more
P ($)
Income=$20
Income=$30
P
Qd
Qd
15
1
2
10
2
3
5
3
4
3
4
5
Qd increases
at all prices
D1
0
Original
demand
schedule
(D1)
New
demand
schedule
(D2)
D
Q2
A change in Demand
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Increase in demand:
Demand curve shift rightward
Decrease in demand:
Demand curve shift leftward
P ($)
P ($)
D1
0
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D2
Q
D2
0
D1
Q
Change in Qd vs. Change in Demand
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cause by price changes
lead to change in Qd
ceteris paribus
movement along the demand
curve
P ($)
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cause by other factors
lead to change in Qd at
corresponding price level
Demand curve shifts leftward or
rightward
P ($)
P1
P2
D
0
Q1
Q2
Q
D2
0
D1
Q
Factors affecting demand
Income (purchasing power)
 Income purchasing power
Superior goods
 E.g. Fashion, Red wine, Fish fin, luxurious mansion, taxi
 Income  Demand
P ($)
D1
0
D2
Q
Factors affecting demand
Inferior goods
 E.g. rice, hut, bus
 Income  Demand
P ($)
D2
0
D1
Q
Factors affecting demand
Price of related goods
 Substitutes: Goods can be replaced easily, to satisfy the same want
 E.g. DVD & Blu-ray Discs, MTR & Bus,
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Good A and Good B are substitute
PA  Qd of Good A   Demand of Good B
P ($)
P ($)
P2
P1
D
0
Q2
Q1
Good A
D1
Q
0
Good B
D2
Q
Factors affecting demand
Substitutes
 Existing
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Coca-Cola vs. Pepsi
Samsung TV vs. Sony TV
E.g. DVD & Blu-ray Discs, MTR & Bus,
Emergence of new product
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2G vs. 3G mobile phone
NDS vs. Gameboy
[ Graphs demo. ]
Factors affecting demand
Price of related goods
 Complements: Goods used jointly to satisfy the same want
 Joint demand
 E.g. DC + memory card, Car + Gasoline
 Good A and Good B are complement
  PA   Qd of Good A   Demand of Good B
P ($)
P ($)
P1
P2
D
0
Q1
Q2
Good A
D1
Q
0
Good B
D2
Q
Factors affecting demand
Derived demand
 Demand of Good X is result in demand of Good Y
 E.g. raw materials, labour
 Good X: flower, Good Y: farmer
  Demand of book   Demand of wood
P ($)
P ($)
D1
0
flower
D2
Q
D1
0
farmer
D2
Q
Factors affecting demand
P ($)
Expectation
 ∆ Future Price:
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Future price,  Demand of present consumption
Future price,  Demand of present consumption
∆Income:

D1
0
D2
Q
∆ Future Price
 Future income,  Demand of present consumption
P ($)
D2
0
∆ Income
D1
Q
Factors affecting demand
Preference
 Preference,  Demand
 E.g. advertisement, marketing strategy, academic reports…
Population
 Population,  Demand
Others
 Weather, seasons, social customs, religious reasons, hygiene,
legislation
 E.g. Smoking is prohibited indoor   Demand of cigarette
Question (p.18)
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Eats less due to income
Improves food quality
Promote sales, P of sushi
P of sushi sauce (complement)
P of hamburger (substitute)
Question
a.
b.
State and explain the relationship between
a printer and an ink cartridge. (2)
Explain, with the help of diagram(s), how
will the demand of cartridge be affected
when the price of printer increases. (6)
Answer
a.
Printer and ink cartridge are complements because they are
needed to be used together to satisfy the same want.
b.
According to the law of demand, increase in price of printer
will lead to decrease in quantity demanded of printer, ceteris
paribus. That is, quantity demanded of printer will change
from Q0 to Q1 when price changes from P0 to P1 (fig.1).
Since printer and cartridge are complements, decrease in
quantity demanded of printer will lead to decrease in
demand of cartridge. The demand curve of cartridge will
shift leftward from D0 to D1 (fig.2).
P ($)
P ($)
P1
P0
D
0
Q1
Q0
Printer
D1
Q
D0
0
Ink cartridge
Q
Marginal Benefit (MB)
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The extra benefit brought by consuming one
more unit of a good.
MB = Maximum willingness (price) to pay at a
margin
The law of diminishing
marginal value
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The more the quantity of a good one owns,
the lower is one’s willingness to pay for
getting one more unit of the good.
P ($)
400
300
200
100
0
Q
1
2
3
4
Consumer surplus
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Willingness to pay =
P1 + P 2 + P3 + P 4 + …
(Q1)

( Q2 ) ( Q 3 ) ( Q 4 )
Consumer surplus = Willingness to pay – actual payment
P ($)
Consumer Surplus
Price
Actual payment
0
D: Willingness to pay curve
Q
Consumer maximization
P
Qd
1000
1
MB ($)
Actual
payment ($)
Consumer gain ($)
(Surplus)
1st unit
1000
400
600
Signal to
gain
800
2
2nd unit
800
400
400
600
3
3rd unit
600
400
200
400
4
4th unit
400
400
0
Max.
gain
5th unit
200
400
-200
Lose
P ($)
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P = MB
Price
MB
0
Q
At P = MB,
Consumer gain the highest surplus

P ($)
P = MB
Price
0
Q

When  P (PNew),
- MB > P originally
- signal to gain more surplus
- Qd
- Until MB = PNew
Conclusion:
To maximize the surplus, an
individual will keep buying a
good until his marginal
willingness to pay equals the
price, i.e. MB=P.
MB (willingness to pay) curve = Demand curve
Marginal willingness
to pay ($)
Price ($)
400
400
300
Derives
300
200
200
100
100
Demand curve
MB curve
0
Q
1
2
3
4
0
Q
1
2
3
4
Question
a)
b)
With reference to the marginal willingness to
pay for a good, explain why free goods do
not have prices. (3 marks)
No one is willing to pay for free goods. Does
this imply that free goods, such as air, do
not have values and will not bring benefits
to consumers? (2 marks)
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
According to the law of diminishing marginal values, the
willingness to pay for a good will decrease when we have more
of it.
The quantity of a free good is sufficient to satisfy all human wants.
This means our marginal willingness to pay will fall to zero;
hence, no one is willing to pay a price for it.
The marginal willingness to pay or the marginal benefit of a free
good is zero. But the total benefit that free goods bring to
consumers is not.
From fig.1, the quantity demanded of free good is at Qf, where
P=0. The area bounded is the consumer surplus, which is also
the total value of consuming the free good.
P ($)
Price = 0
0
Qf
Q