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DEMAND LECTURE II

DEMAND LECTURE II. LETS LOOK AT THE COMMODITY WHEAT. Price Surplus P 1 Supply P e Demand Q e Quantity / unit of time. A SURPLUS. A. P e and Q e represent the market clearing price and quantity.

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DEMAND LECTURE II

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  1. DEMAND LECTURE II

  2. LETS LOOK AT THE COMMODITY WHEAT Price Surplus P1 Supply PeDemand QeQuantity / unit of time

  3. A SURPLUS A. Pe and Qe represent the market clearing price and quantity. B. Assume the government sets a price at P1: 1. There is a surplus of goods. 2. Price must fall for the market to clear.

  4. LETS LOOK AT THE COMMODITY GASOLINE Price Supply PeDemand P2 Shortage QeQuantity / unit of time

  5. A SHORTAGE C. Assume the government sets a price at P2: 1. There is a shortage of goods. 2. Price must rise for the market to clear.

  6. SURPLUS AND SCARCITY? D. We could have a surplus and still have a scarce commodity, RIGHT ? 1. Yes. This is due to there not being enough goods to meet demand at a price of zero.

  7. DETERMINANTS OF DEMAND As a commodity's own price changes, we move along the existing demand curve. (Law of Demand) A. Other factors affect the demand curves position, shape, and slope.

  8. DETERMINANTS OF DEMAND These other determinants, in addition to the commodity's own price are: a. Consumer disposable income. b. Price of substitutes. c. Price of complements. d. Consumer preferences. e. Expectations about the future.

  9. DETERMINANTS OF DEMAND f. Changes in the population. g. Weather. h. Length of adjustment period. i. Availability of substitutes. j. Proportion of the consumer’s budget that a particular good represents.

  10. Consumer’s Disposable Income 1. If we increase consumer's disposable income ceteris paribus, what happens? · He/she is able to purchase more at all price levels.

  11. 2. The demand curve shifts to the right. Price D1 D0 Quantity

  12. 3. If we decrease the consumer's disposable income ceteris paribus, what happens ? · The consumer cannot purchase the same amount of the commodity as before, over the entire range of prices.

  13. 4. The demand curve is said to shift to the left. Price D0 D1 Quantity

  14. 5. Associated with this income effect, we can create another sub-classification for commodities:

  15. Normal Goods or Services An Increase in disposable income, shifts Demand curve right.  Id Demand

  16. Price D1 D0 Quantity

  17. Normal Goods or Services A Decrease in disposable income shifts Demand curve left  Id Demand

  18. Price D0 D1 Quantity

  19. Inferior Good or Service An Increase in disposable income shifts curve left.  Id Demand

  20. Price D0 D1 Quantity

  21. Inferior Good or Service A Decrease in disposable income shifts curve right.  Id Demand

  22. Price D1 D0 Quantity

  23. Inferior Good or Service Examples: • Macaroni and cheese dinners, • potatoes, • and rice • ROAD KILL !!

  24. Change in the price of substitutes, ceteris paribus: An increase in the price of a substitute will result in an increase in the demand for the commodity of interest (COI) (demand shifts right).

  25. For example, lets look at beef while considering sheep as a substitute: Let the quantity of Sheep available become restricted. What happens? · There is an increase in the price of sheep.

  26. Increase in price of Sheep due to a decrease in Supply of Sheep: Price S1 S0 sheep Market P1 P0 D Q1 Q0 Qd of pork/ut

  27. There is an increase in the demand for beef (COI) because of the increase in the price of sheep (SUBSTITUTE). Price S0 Sheep Market P1 P0 D1 D0 Q0 Qd of beef/ut

  28. Sheep BEEF S1 S0 S0 P1 D1 P0 P1 D0 P0 D0

  29. Substitutes: Therefore, an increase in the price of a substitute will shift the entire demand curve of the commodity of interest to the right.

  30. Substitutes: A decrease in the price of a substitute will shift the entire demand curve of the commodity of interest to the left.

  31. Substitutes: Immediate effect of a supply restriction for the substitute is a price increase. This will affect the demand curve for the COI by increasing demand (shifts to the right) for the COI.

  32. Substitutes: Immediate effect of a increase in supply is a price reduction.

  33. Substitutes:  PsubDCOI AND  Psub DCOI

  34. Reflect Back: We have talked about what has happened in agriculture when wage rates have increased. Capital and labor are substitutes for each other. We have discussed that as the wage rate has increased, the demand for capital has increased.

  35. Change in the price of a complement, ceteris paribus: Complements are goods that go together, such as: • left and right shoes, • gas and cars, • milk and cereal, • bread and butter, • guns and ammo, • etc.

  36. Compliments: If the price of a complement increases, then the demand for the COI decreases.  PcompDCOI

  37. Compliments: Price Let the price of milk increase. Since cereal is a complement of milk, its demand will decrease. D0 D1 Qd/ut

  38. Compliments: If the price of a complement decreases, the demand for the COI increases. PcompDCOI

  39. Compliments: Price Let the price of milk decrease. Since cereal is a complement of milk, its demand will increase. D1 D0 Qd/ut

  40. Consumer preferences and taste As preferences change the demand curve will also change. For example: What would be the result of the following statements, if true, on the demand curve for each commodity ?

  41. Animal fat leads to a higher risk of heart attacks. Price Result: Demand for red meat D0 D1 Qd/ut

  42. Nitrites in bacon have been linked to cancer. Price Result: Demand for bacon D0 D1 Qd/ut

  43. Increasing fiber in the diet reduces the chance of getting colon cancer. Result: Demand for high fiber cereals and popcorn. Price D1 D0 Quantity / unit of time

  44. Trichinae can be eliminated in Sheep by a new irradiation process Price D0 Quantity / unit of time Result: ???????

  45. National Inquirer says that people who own and care for rose bushes live 20 years longer than the average person. Price D1 D0 Quantity / unit of time Result: Demand for rose bushes

  46. Expectations about the future The peanut butter scare: a news release said that the peanut crop would be short that year and peanut butter prices were expected to double.

  47. Expectations about the future Result: People bought 3 lbs. of peanut butter that month instead of 1lb.  Demand for peanut butter. Due to Expectations of higher Price.

  48. Expectations: The Self-Fullfilling Prophecy ! Since consumers expect prices to increase, they all run out to buy NOW. This causes demand to increase, and prices are pushed up very quickly!

  49. Graphically Speaking: Price $2.00 D1 D0 1 3 lbs. per month

  50. NOTE: If the commodity we were analyzing was not storable, then the demand curve may NOT shift.

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