Consumer Demand & Producer Supply. To Self-Assess your understanding of Demand, Demand lines and the Law of Demand (definitions, the construction of graphs and how to explain them using notation). To Apply your Knowledge by proving the Law of Demand with the aid of a Graph. - PowerPoint PPT Presentation
Consumer Demand & Producer Supply. To Self-Assess your understanding of Demand, Demand lines and the Law of Demand (definitions, the construction of graphs and how to explain them using notation). To Apply your Knowledge by proving the Law of Demand with the aid of a Graph. To be Able to Define, Explain & give Examples of Exceptions to the Law of Demand. To Know How to Construct & Explain a Perverse or Regressive Demand Line. To be Able to Define, Illustrate & Explain Producer Supply. D.Skelly TY Economics November 2013 1
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D.Skelly TY Economics November 2013
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Consumer Demand & Producer Supply.To Self-Assess your understanding of Demand, Demand lines and the Law of Demand (definitions, the construction of graphs and how to explain them using notation).To Apply your Knowledge by proving the Law of Demand with the aid of a Graph.To be Able to Define, Explain & give Examples of Exceptions to the Law of Demand. To Know How to Construct & Explain a Perverse or Regressive Demand Line.To be Able to Define, Illustrate & Explain Producer Supply.
the Law of Demand 1. Giffen Goods2. Snob / Status Goods or Items of Conspicuous expenditure.3. Speculative Goods4. Additive Goods1. To draw a graph of a Perverse or Regressive demand line. 2. To explain using Notation why it does not comply with the Law of Demand.
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With the aid of a graph explain a Perverse Demand Line?
Exceptions to the Law of Demand1. Giffen GoodsFor some necessities an ↑in P causes an ↑ in Qd.Goods of lower quality make up a large part of expenditure of low-income families.Even if the price of own brand bread (a Giffen good) rises, those on low incomes may continue to buy the good even after the price increase. The shortfall in income as a result of the price increase of the necessity (Giffen good) is made up by cutting back on something else (e.g. a luxury).
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Definition: Giffen Goods.Giffen Goods are goods with a positive price effect (relationship between P & Qd) , i.e. when P↑, Qd ↑ and when P↓, Qd ↓
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Exceptions to the Law of Demand2. Status Symbols / Snob items / Goods of Conspicuous ConsumptionSome goods are attractive because of their exclusiveness or high price.A P↑ makes them more exclusive and attractive for some consumers.A P↓ makes these goods less exclusive and less desirable to buy.Examples include, designer clothes and sports cars.
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Exceptions to the Law of Demand3. Speculative GoodsIf potential buyers think that prices are likely to be higher in the future compared to current prices, the current quantity demanded may not fall even if prices increase. For example, a house cost €250,000 in 2012, the current price of that house today is €300,000. It is expected in 2014, that the price will increase to €350,000. Hence, Qd for houses at today’s prices may ↑ even though P has ↑ from €250,000 to €300,000. The reason is because a further price increase is expected,(Property Boom)
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Exceptions to the Law of Demand4. Goods of an addictive natureA person no longer acts Rationally if they become addicted to goods , e.g. drugs . They buy more of the good in order to get the same Utility from their consumption even when the price of those goods increase.
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Producer SupplyA Supply Line is a graph illustrating
the number of units of a good made available for sale by the producer / seller at various market prices at any given time.
There is a Positive Relationship between P and Qs, i.e. as P↑, Qs↑ and vice versa (the Law of Supply).
The Supply Line is usually upward sloping from left to right (Remember?: Land is fixed in supply)
The Law of Demand States that when P↑, Qd↓, and Vice Versa. We demonstrated and explained this with the aid of a Graph.
There are 4 Exceptions to the Law of Demand: Giffen Goods, Snob Goods, Speculative goods, and goods of an addictive nature. We illustrated and explained that these have a Perverse or Regressive Demand Line. This means that they do not comply with the Law of Demand.
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SummaryWe examined Supply from the
Producers perspective.We learned why there is a Positive
Relationship between P & Qs. We know that this means that when P↑, Qs↑ and when P↓Qs↓ .
We learned how to illustrate and explain, with the aid of a Graph (a Supply Line), the Positive Relationship between P and Qs.
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HomeworkAnswer Question 3 on Hand-Out.Read in advance and underline the
main points about Equilibrium in the notes I gave you on Demand and Supply.
Preview: Next ClassThe “Free Market” in 60 Seconds.
In a “Free Market”, price will eventually settle at the level where Qd=Qs.This position where there is no tendency for prices to change is called the MARKET EQUILBRIUM.At Equilibrium, the allocation of goods is most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded.
