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FINA 251 Fundamentals of Microeconomics Week 4 2016 Chapter-3 1 Dr. Mazharul Islam

3 Demand Dr. Mazharul Islam

3 Lesson Objectives Define demand quantity demanded Describe a competitive market and think about a price as an opportunity cost Explain law of demand influences of demand Explain how to draw demand curve and make demand schedule Dr. Mazharul Islam

4 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. Dr. Mazharul Islam

5 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. Dr. Mazharul Islam

6 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 Dr. Mazharul Islam

7 Law of Demand Why does a change in the price change the quantity demanded? Two reasons: § Substitution effect § Income effect Dr. Mazharul Islam

8 Law of Demand q 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. Dr. Mazharul Islam

9 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 Dr. Mazharul Islam

10 Demand Curve and Demand Schedule demand curve shows the relationship between the quantity demanded of a good and its price during a given period when other things are constant. A 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 Dr. Mazharul Islam

11 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 o Q 10 20 30 40 50 60 70 80 Quantity of Corn Dr. Mazharul Islam

12 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) < and Dr. Mazharul Islam

13 A Change in Demand (Determinants or Factors of Demand) Changes in the prices of related goods 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). For Dr. Mazharul Islam

14 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. Dr. Mazharul Islam

15 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) Dr. Mazharul Islam

16 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. q An unfavorable change in consumer preferences will decrease demand curve will shift leftward. q Dr. Mazharul Islam

17 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. Dr. Mazharul Islam

18 A Change in Demand Price of Corn (Determinants or Factors of Demand) P CORN P \$5 4 3 2 1 QD 10 30 20 40 35 60 55 80 80 + Increase in Quantity Demanded \$5 4 3 2 1 o Increase in Demand D’ D 10 20 30 40 50 60 70 80 Quantity of Corn Q Dr. Mazharul Islam

19 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. Dr. Mazharul Islam

20 A Change in Demand (Determinants or Factors of Demand) Changes in Taste (or Preferences) An unfavorable change in consumer preferences will decrease demand curve will shift leftward. Dr. Mazharul Islam

21 Now it’s over for today. Do you have any question? Dr. Mazharul Islam