Download - law of economics
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Law of DemandLaw of Demand
H ldi ll th thi t t ( t i Holding all other things constant (ceterisparibus), there is an inverse relationshipb t th i f l d dbetween the price of a normal good andthe quantity of the normal goodd d d ti i ddemanded per time period Substitution Effect Income Effect
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 1
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Components of Demand:pThe Substitution Effect
A i th t l i i t t Assuming that real income is constant: If the relative price of a good rises, then
ill t t b tit t fconsumers will try to substitute away fromthe good. Less will be purchasedIf the relative price of a good falls then If the relative price of a good falls, thenconsumers will try to substitute away fromother goods More will be purchasedother goods. More will be purchased
The substitution effect is consistent withthe law of demand
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 2
the law of demand
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Components of Demand:Th I Eff tThe Income Effect
The real value of income is inverselyThe real value of income is inverselyrelated to the prices of goods
A change in the real value of income: A change in the real value of income: will have a direct effect on quantity
demanded if a good is normaldemanded if a good is normal will have an inverse effect on quantity
demanded if a good is inferiordemanded if a good is inferior The income effect is consistent with the
law of demand only if a good is normalCopyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 3
law of demand only if a good is normal
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Individual Consumers DemandQdX = f(PX, I, PY, T)
quantity demanded of commodity XQdX = quantity demanded of commodity X by an individual per time period
i it f dit X
QdX
P price per unit of commodity X
consumers income
PX =
I = co su e s co e
price of related (substitute or l t ) dit
PY =complementary) commodity
tastes of the consumerT =
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 4
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Qd f(P I P T)QdX = f(PX, I, PY, T)
QdX/PX < 0 if a good is normalQdX/I > 0 if a good is normalQdX/I > 0 if a good is normalQdX/I < 0 if a good is inferiorQdX/PY > 0 if X and Y are substitutesQdX/PY < 0 if X and Y are complements
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 5
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Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 6
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The image cannot be displayed. Your computer may not have enough memory to open the image, or the image may have been corrupted. Restart your computer, and then open the file again. If the red x still appears, you may have to delete the image and then insert it again.
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 7
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Market Demand CurveMarket Demand Curve Horizontal summation of demand
curves of individual consumers Market demand is also influenced by
Bandwagon Effect when people demand a commodity because
others are purchasing it (e g Tatas Nano Car)others are purchasing it (e.g., Tata s Nano Car) Snob (Veblen) Effect
arises when some consumers want to bearises when some consumers want to bedifferent from other consumers by demandingless of a commodity of mass consumption anddemanding more of expensive products
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 8
demanding more of expensive products
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Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 9
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Market Demand FunctionQDX = f(PX, N, I, PY, T)
quantity demanded of commodity XQDX = quantity demanded of commodity X
price per unit of commodity X
QDXPX =
number of consumers on the market
i
N =
I consumer income
price of related (substitute or
I =
PY = p ce o e a ed (subs u e ocomplementary) commodity
t t
Y
TCopyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 10
consumer tastesT =
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Demand Curve Faced by a Firm D d M k t St tDepends on Market Structure
Imperfectly competitive markets such as Imperfectly competitive markets such as Monopoly, Monopolistic Competition and OligopolyOligopoly Firm is a price maker
Fi d d h ti l Firms demand curve has a negative slope Perfectly competitive market
Firm is a price taker Firms demand curve is horizontal
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 11
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Demand Curve Faced by a Firm yDepends on the Type of Product
Durable Goods such as washing Durable Goods such as washingmachines, refrigerators, etc.
Demand is volatile or unstable as Demand is volatile or unstable ascompared to demand for non-durablegoods
Producers Goods that used in theproduction of other goods (e.g., steel,cement, etc.) Demand is derived from demand for final
dCopyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 12
goods
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Linear Demand FunctionLinear Demand Function
QX = a0 + a1PX + a2N + a3I + a4PY + a5T
PPX Intercept:a0 + a2N + a3I + a4PY + a5T
Slope:QX/PX = a1
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QX
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Linear Demand Function Example Part 1
Demand Function for Good X
QX = 160 - 10PX + 2N + 0 5I + 2PY + TQX 160 10PX + 2N + 0.5I + 2PY + T
Demand Curve for Good XDemand Curve for Good X
Given N = 58, I = 36, PY = 12, T = 112
QX = 430 - 10PX
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Linear Demand FunctionLinear Demand Function Example Part 2
Inverse Demand Curve for Good X
PX = 43 0.1QXTotal and Marginal Revenue FunctionsTotal and Marginal Revenue Functions
TRX = 43QX 0.1QX2X X XMRX = 43 0.2QX
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 15
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Price Elasticity of Demand
/Q Q Q P P i t D fi iti //P
Q Q Q PEP P P Q
= = Point Definition:
Linear Function: 1PPE aQ
= Q
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 16
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Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 17
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Price Elasticity of Demand
A D fi iti 2 1 2 1Q Q P PE +Arc Definition: 2 1 2 1
2 1 2 1P
Q QEP P Q Q
= +
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 18
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Marginal Revenue and PriceMarginal Revenue and Price Elasticity of Demand
11MR PE
= + PE
Copyright 2007 by Oxford University Press, Inc.PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Slide 19
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Marginal Revenue and PriceMarginal Revenue and Price Elasticity of Demand
PX1PE >
1PE =
1PE 1) as compared to the demand curve, the less is thetax burden for sellers or the more is the tax burden forbuyersy
When the supply curve for a commodity is less elastic(eps < 1) as compared to the demand curve, the more isthe tax burden for sellers or the less is the tax burden for
Copyright 2007 by Oxford University Press, Inc.7/6/2010
the tax burden for sellers or the less is the tax burden forbuyers