Supply & Demand AnalysisSupply & Demand Analysis

Miss VareeMiss Varee Spring 2004Spring 2004Economics Economics

Essential QuestionsEssential Questions

What is the difference between What is the difference between “Quantity Demanded” and “Change “Quantity Demanded” and “Change in Demand?” in Demand?”

What are the “Determinants of What are the “Determinants of Demand?” Demand?”

Define “substitute goods” and give Define “substitute goods” and give an example.an example.

Define “complementary goods” and Define “complementary goods” and give an example.give an example.

Draw a Demand & Supply Graph-Draw a Demand & Supply Graph-show Prices, Quantity, & Equilibriumshow Prices, Quantity, & Equilibrium

What is “Demand?”What is “Demand?”

A willingness to buy a A willingness to buy a product at a certain priceproduct at a certain price

What are some examples of What are some examples of goods you demand as a goods you demand as a consumer? consumer?

List 5 things that you have List 5 things that you have “demanded” in the past month“demanded” in the past month

Miss Varee’s “Demand List”Miss Varee’s “Demand List”

Would you Would you prefer prefer brand brand name name or or generic generic products? products?

Law of DemandLaw of Demand

People will buy People will buy more of a more of a product at a product at a lower price than lower price than a higher pricea higher price

Why do you Why do you think this holds think this holds true? true?

Demand ScheduleDemand Schedule

Demand ScheduleDemand Schedule

A list of quantity of a product A list of quantity of a product that people are wiling to buy at that people are wiling to buy at each priceeach price

At which price are consumers At which price are consumers willing to buy the LEAST willing to buy the LEAST pizzas?pizzas?

ONLY PRICES WILL CHANGE ONLY PRICES WILL CHANGE “QUANTITY DEMANDED”“QUANTITY DEMANDED”

Quantity DemandedQuantity Demanded

A movement along the A movement along the Demand Curve that DOES Demand Curve that DOES NOT result in a shift. NOT result in a shift.

A price change simply moves A price change simply moves you to a new point on the you to a new point on the SAME curveSAME curve

Demand Schedule ExampleDemand Schedule Example

Supply and Demand GraphSupply and Demand Graph

Demand CurveDemand Curve

A downward sloping lineA downward sloping line As one variable goes up, the As one variable goes up, the

other variable goes downother variable goes down It slopes downward because

consumers buy less at higher prices, more at lower prices

The demand curve illustrates an The demand curve illustrates an inverse relationship between inverse relationship between price & quantityprice & quantity

A Change in DemandA Change in Demand

A A change in demand is change in demand is determined by a factor determined by a factor in the in the “Determinants of Demand”“Determinants of Demand”

The curve will either shift to the The curve will either shift to the left (decrease) left (decrease) or or right right (increase)(increase)

Demand Curve (Right Shift)Demand Curve (Right Shift)

Increases Increases in in Demand Curve Demand Curve will shift to the will shift to the rightright

Demand CurveDemand Curve(Leftward Shift)(Leftward Shift)

Determinants of DemandDeterminants of Demand

Consumer Tastes and Consumer Tastes and PreferencesPreferences

Potential CustomersPotential Customers Money Income of ConsumersMoney Income of Consumers Substitute GoodsSubstitute Goods Complementary GoodsComplementary Goods Price ExpectationsPrice Expectations

Tastes & PreferencesTastes & Preferences

People have different tastes & People have different tastes & preferencespreferences

Food, Music, Clothes, etcFood, Music, Clothes, etc Advertising, Fashion, & Fads Advertising, Fashion, & Fads

also influence your also influence your tastes and tastes and preferences preferences for a goodfor a good

Potential CustomersPotential Customers

A large number A large number of consumers of consumers can produce a can produce a greater demand greater demand for the goodfor the good

$ Income of Consumers$ Income of Consumers

If income increases, consumers If income increases, consumers will demand “normal goods” will demand “normal goods” instead of “inferior goods.”instead of “inferior goods.”

Normal goods=luxury goods– Normal goods=luxury goods– brand names (i.e. Guess?, brand names (i.e. Guess?, Levi’s, The Gap, Nordstrom’s) Levi’s, The Gap, Nordstrom’s)

Inferior goods=“non-brand Inferior goods=“non-brand name” goods (i.e. 99 cent store, name” goods (i.e. 99 cent store, Target, Outdoor Flea Markets) Target, Outdoor Flea Markets)

Substitute GoodsSubstitute Goods

If the price of one good increases, If the price of one good increases, the consumer will be buy the the consumer will be buy the alternative (or “substitute”) good, alternative (or “substitute”) good, instead.instead.

This usually happens with similar This usually happens with similar products.products.

If the price of a can of Coca-Cola If the price of a can of Coca-Cola increases to $2.00 while a can of increases to $2.00 while a can of Pepsi is $1.00 (and if you are Pepsi is $1.00 (and if you are indifferent between both), which one indifferent between both), which one would you choose? would you choose?

Complementary GoodsComplementary Goods

Some goods “go together.” They Some goods “go together.” They will “complement” one another.will “complement” one another.

If the price one complement If the price one complement good increases, the other good good increases, the other good will also increase (vice versa).will also increase (vice versa).

Examples:Examples:

--Cereal & Milk--Cereal & Milk --Cookies & Milk --Cookies & Milk

--Peanut Butter & Jelly--Peanut Butter & Jelly

Price ExpectationsPrice Expectations

If people expect that prices of a If people expect that prices of a good will increase, it will (and good will increase, it will (and vice versa).vice versa).

This will result in a change in This will result in a change in demand and shift the demand demand and shift the demand curve.curve.