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Fundamentals of Microeconomics: Demand and its Determinants

This lesson explores the concept of demand in microeconomics, including the definition, quantity demanded, the law of demand, and how to draw demand curves. It also examines the factors that influence demand, such as prices of related goods, expected future prices, income, expected future income and credit, population, and preferences.

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Fundamentals of Microeconomics: Demand and its Determinants

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  1. College of Business – Rabigh Chapter-3 FINA251Fundamentals of MicroeconomicsWeek 42016

  2. 3 Demand

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

  4. Demand • Demandindicates 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.

  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.

  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

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

  8. Law of Demand • 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.

  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

  10. P QD Demand Curve and Demand Schedule • A demand curve shows the relationship between the quantity demanded of a good and its price during a given period when other things are constant. DEMAND SCHEDULE Various Amounts $5 4 3 2 1 10 20 35 55 80 A Series of Possible Prices …a specified time period …other things being equal

  11. P QD Demand Curve and Demand Schedule Price of Corn P $5 4 3 2 1 CORN 10 20 35 55 80 $5 4 3 2 1 D Q 10 20 30 40 50 60 70 80 Quantity of Corn o

  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 and consumers) • Preferences (tastes)

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

  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.

  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)

  16. A Change in Demand (Determinants or Factors of Demand) Changes in Preference (Taste) • A favorable change in consumer preferences meansIf 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. • An unfavorable change in consumer preferences will decrease demand and demand curve will shift leftward.

  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.

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

  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.

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

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

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