Demand

Willingness to Pay - is the maximum amount a person would be willing to pay, sacrifice or exchange for a good

Consumer Surplus – the value to a consumer of consumption of a good, minus the price paid

slide 1

Demand

Diminishing marginal value – the value of last unit consumed declines as the number consumed rises

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Demand slide 3

MODEL OF DEMAND

The model of demand is an attempt to explain the amount demanded of any good or service.

DEMAND DEFINED

The amount of a good or service a consumer wants to buy, and is able to buy per unit time.

Demand slide 4

THE DEMAND CURVE

The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand.

The DEPENDENT variable is the quantity demanded.

The INDEPENDENT variable is the good’s own price.

Demand slide 5

THE LAW OF DEMAND

The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand.

The Law of Demand says that demand curves are negatively sloped.

Demand slide 6

A DEMAND CURVE

A demand curve must look like this, i.e., be negatively sloped.

own price

quantity demanded

demand

Market for tacos

Demand slide 7

The demand curve means:You pick a price, such a p0, and the demand curve shows

how much is demanded.own price

quantity demanded

demand

p0

Q0

Market for tacos

Demand slide 8

What if the price of tacos were less than p0?

How do you show the effect on demand?

Go to hidden slide

Demand slide 10

Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the good’s own price.

own price

quantity of beer

demand @ I = $1000

Market for beer

How does this affect the demand curve?

How does this affect the demand curve?

$1/can

Demand slide 12

Normal and inferior goods defined

Normal good: When an increase in income causes an increase in demand.

Inferior good: When an increase in income causes a decrease in demand.

Demand slide 13

Substitutes defined

Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other.

Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.

Demand slide 14

Complements defined

Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other.

Thus, an increase in the price of pizza would decrease the demand for beer if the goods were complements.

Demand slide 15

DEMAND SUMMARY

Demand is a function of own-price, income, prices of other goods, and tastes.

The demand curve shows demand as a function of a good's own price, all else constant.

Changes in own-price show up as movements along a demand curve.

Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve.

Supply slide 16

MODEL OF SUPPLYThe model of supply is an attempt to explain

the amount supplied of any good or service.

SUPPLY DEFINEDThe amount of a good or service a firm wants

to sell, and is able to sell per unit time.

Supply slide 17

YOU COULD WRITE THE MODEL THIS WAY:

The supply function for tacos

QS(tacos) = S(Ptacos, Ptaco shells, Plettuce, Plabor,

Ptomatoes, . . . ,technology, taxes &

subsidies)

Supply slide 18

THE SUPPLY CURVE

The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply.

The DEPENDENT variable is the quantity supplied.

The INDEPENDENT variable is the good’s own price.

Supply slide 19

THE LAW OF SUPPLY

The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.

The Law of Supply says that supply curves are positively sloped.

Supply slide 20

A SUPPLY CURVE

A supply curve must look like this, i.e., be positively sloped.

own price

quantity supplied

supply

TACO MARKET

Supply slide 21

The supply curve means:

You pick a price, such a p0, and the supply curve shows how much is supplied.

own price

quantity supplied

supply

p

0

Q

0TACO MARKET

Supply slide 22

own price

quantity supplied

supply

p

0

Q

0TACO MARKET

If the price of tacos rises, how is the supply curve affected?

Supply slide 24

Other factors affecting supply

The question here is how to show the effects of changes in input prices, technology, and taxes.

The answer, of course, is that changes in input prices, technology, or taxes cause the supply curve to shift.

Supply slide 25

Changes in input prices

Consider the supply of beer, and suppose the price of hops, a crucial input to beer, falls. Beer firms now find that beer production is more profitable than it was before, and they respond to this be increasing the supply of beer.

Supply slide 26

The price of hops falls from $300 per ton to $100 per

ton.

own price

quantity

supply @ hops price of $300/ton

BEER MARKET

How will this affect the supply curve for beer?

How will this affect the supply curve for beer?

Go to hidden slide

Supply slide 28

Change in technology

An improvement in technology makes it possible to produce a level of output with fewer inputs than before.

Because this lowers the cost of production, profits rise, and firms will try to supply more.

Supply slide 29

own price

quantity

supply @ old technology

BEER MARKET

Suppose beer technology improves.

How does this affectthe supply curve for beer?

How does this affectthe supply curve for beer?

Go to hidden slide

Supply slide 31

price

Q

S (no tax)

How would you suspect an excise tax affects the supply of a good?

Go to hidden slide

Supply slide 33

Supply summary

Supply is a function of own price, input prices, and technology.

The supply curve shows supply as a function of own price, all else constant.

Changes in a good’s own price show up as movements along a supply curve.

Changes in input prices, technology, or taxes show up as shifts in the supply curve.