DEMAND CURVE
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DEMAND: Quantities of a good or service a consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus
According to the law of demand, there is a Negative Causal Relationship between the price of a good and quantity demanded over a particular period: as price increases, quantity demanded falls; as price decreases, quantity demanded rises
This downward-sloping demand curve is due to Decreasing Marginal Benefit: as the marginal benefit (the extra benefit consumers gain from each additional unit of consumption) falls as the quantity consumed increases, consumers will only be induced to buy an additional unit if prices fall
MARKET DEMAND CURVE
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MARKET DEMAND: Sum of all individual demands for a good
Example: Market for Chocolate
Consumer A and Consumer B have different demand for Chocolate bars
The Market Demand is derived by adding the quantity demanded by Consumer A to the quantity demanded by Consumer B, and so on until all quantities demanded by all consumers of chocolate bars are added up
For example, at the price of $4, Consumer A demands 4 bars and Consumer B demands 5 bars; this is added together with all the quantities demanded by other consumers to obtain a market demand of 6000 chocolate bars per week at this price level as seen in the Market Demand curve, Dm
SHIFT OF DEMAND CURVE: NON-PRICE DETERMINANTS OF DEMAND
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NON-PRICE DETERMINANTS OF DEMAND: Variables other than price that leads to a change in demand, which is shown by a shift of the entire demand curve
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A Rightward Shift of the demand curve from D1 to D2 indicates that more is demanded at a given price, hence an Increase in Demand
A Leftward Shift of the demand curve from D1 to D3 indicates that less is demanded at a given price, hence a Decrease in Demand
NON-PRICE DETERMINANTS OF DEMAND:
1) CHANGES IN INCOME
Normal Goods
A good is a Normal Good if demand varies directly with income; in other words, demand and income moves in the same direction
As demand for a Normal Good varies directly with income, an increase in consumer income will lead to an increase in demand, resulting in a rightward shift of the demand curve from D1 to D2, vice versa (most goods are normal goods)
Inferior Goods
A good is an Inferior Good if demand varies inversely with income; in other words, demand and income moves in the opposite direction (examples of inferior goods are second hand-clothes and used cars)
As consumers switch from inferior goods to more expensive alternatives with an increase in income, an increase in consumer income will lead to a decrease in demand, resulting in a leftward shift of the demand curve from D1 to D3, vice versa
2) CHANGES IN TASTE AND PREFERENCES
If taste and preferences change in favor of a good, such that a good becomes more popular, this will lead to an increase in demand, resulting in a rightward shift of the demand curve from D1 to D2
If taste and preferences change against a good, such that a good becomes less popular, this will lead to a decrease in demand, resulting in a leftward shift of the demand curve from D1 to D3
3) CHANGES IN PRICE OF RELATED GOODS
Substitute Goods
Two goods - Good X and Good Y - are Substitute Goods if they satisfy a similar need (an example of substitute goods are Coca-Cola and Pepsi)
If the price of Good X increases, the demand for Good Y will increase, resulting in the demand curve for Good Y to shift to the right from D1 to D2; this is because an increase in price of Good X will cause consumers to switch to consuming the other substitute good, Good Y
In other words, when there is a change in price of either good, the demand for substitute goods, Good X and Good Y, moves in the opposite direction
Complementary Goods
Two goods - Good X and Good Y - are Complementary Goods if they are used together (an example of complementary goods are DVDs and DVD players)
If the price of Good X increases, the demand for Good Y will decrease, resulting in the demand curve for Good Y to shift to the left from D1 to D3; this is because an increase in price of Good X will decrease the demand for the good, thereby reducing the demand for the complement good, Good Y, as they are consumed together
In other words, when there is a change in price of either good, the demand for complementary goods, Good X and Good Y, moves in the same direction
4) CHANGES IN DEMOGRAPHIC
If there is a change in demographic which causes an increase in the number of consumers, this will lead to an increase in demand, resulting in a rightward shift of the demand curve from D1 to D2
If there is a change in demographic which causes a decrease in the number of consumers, this will lead to a decrease in demand, resulting in a leftward shift of the demand curve from D1 to D3
These demographic changes may include changes in size, average age, and sex ratios of a population (e.g., a country with an aging population may experience increasing demand for elderly care products)
MOVEMENT ALONG DEMAND CURVE
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MOVEMENT ALONG DEMAND CURVE: Any change in price produces a change in quantity demanded, which is shown as a movement on the demand curve
SHIFT OF DEMAND CURVE: Any change in a non-price determinant of demand leads to a change in demand, which is shown by a shift of the entire demand curve
Referring to Figure (a), If the price of a good decreases from P1 to P2, the quantity demanded increases from Q1 to Q2, resulting in a movement along the demand curve from A to B
Referring to Figure (b), if there is a change in a non-price determinant of demand which increases demand, the demand curve shifts rightward from D1 to D2; oppositely, a decrease in demand will cause the demand curve to shift leftward from D1 to D3
DEMAND FUNCTION
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The demand function appears as an equation taking the form:
Qd = a - bP
Where
Qd is the quantity demanded - the dependent variable on the x-axis
P is the price - the independent variable on the y-axis
a is the Q-intercept (horizontal intercept)
-b is the slope, given by 𝚫Qd / 𝚫P
As the slope of the demand curve, -b, is a negative sign, this equation shows the negative causal relationship between price and quantity demanded as seen in the law of demand
PLOTTING DEMAND CURVE
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If given a demand function specifying numerical values for a and b, the relationship described by the equation can be expressed in a demand schedule to plot a graph of the curve
Example: Chocolate bars
Suppose the demand function for chocolate bars is
Qd = 14 - 2P
Where
Qd is the quantity of chocolate bars demanded - the dependent variable on the x-axis
P is the price of chocolate bars - the independent variable on the y-axis
14 is the Q-intercept (horizontal intercept)
-2 is the slope, given by 𝚫Qd / 𝚫P
With the demand function specifying the numerical values of a and b, the relationship described by the equation can be expressed in a demand schedule to plot a graph of the curve:
Referring to Figure (a), the demand schedule for chocolate bars can be obtained by setting P equal to different values, thereby solving for Qd in each case to obtain different price-quantity combinations
Example: When P = 1, Qd = 14 - 2(1) = 12, When P = 2, Qd = 14 - 2(2) = 10
Referring to Figure (b), the demand schedule can be used to plot the demand curve for chocolate bars with price in the y-axis and quantity in the x-axis
NOTE: Since the demand curve is linear, only two points are needed to draw the demand curve
SHIFT OF DEMAND CURVE: CHANGES IN PARAMETER ‘a’
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As mentioned previously, any change in a non-price determinant of demand will result in a parallel shift of the demand curve; hence, this change in demand will appear as change in the value of ‘a’ by the same amount:
Decrease in Demand: Qd = (a - decrease in quantity) - bP
Increase in Demand: Qd = (a + increase in quantity) - bP
Example: Chocolate bars
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Case 1: Decrease in Demand
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Suppose the demand function for chocolate bars is
Qd = 14 - 2P.
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However, if a fall in price of ice cream, a substitute good, leads to an increase in demand for ice cream by 4000 bars per week at any given price, What is the new demand function for chocolate bars?
As ice cream and chocolate bars are substitute goods, a decrease in price of ice cream will attract consumers away from chocolate bars, thus increasing the demand for ice cream by 4000 bars per week
Hence, this will cause the demand for chocolate bars to decrease, resulting in the demand curve for chocolate bars to shift to the left by 4000 bars per week at any given price
To find this new demand function corresponding to the new demand curve, the new value of paramter ‘a’ needs to be calculated
This can be found by taking the initial value of a = 14 (thousand) and subtracting from that the change in demand of 4 (thousand): New Value of ‘a’ is 14 - 4 = 10
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ab
Therefore, the new demand function is: Qd = 10 - 2P
Case 2: Increase in Demand
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Suppose the demand function for chocolate bars is
Qd = 14 - 2P.
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However, if the arising health benefits changes the taste and preferences of consumers in favor of chocolate bars, thereby increasing demand by 5000 bars per week at any given price, What is the new demand function for chocolate bars?
As the taste and preferences of consumers changes in favor of chocolate bars, the demand for chocolate increases by 5000 bars per week at any given price
Hence, this will cause the demand for chocolate bars to increase, resulting in the demand curve for chocolate bars to shift to the right by 5000 bars per week at any given price
To find this new demand function corresponding to the new demand curve, the new value of paramter ‘a’ needs to be calculated
This can be found by taking the initial value of a = 14 (thousand) and adding the change in demand of 5 (thousand): New Value of ‘a’ is 14 + 5 = 19
Therefore, the new demand function is: Qd = 19 - 2P
STEEPNESS OF DEMAND CURVE: CHANGES IN PARAMETER ‘b’
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The parameter ‘b’ is the slope of the demand function defined as the change in quantity demanded over the change in price (𝚫Qd / 𝚫P):
The smaller the absolute value of ‘b’, the steeper the demand curve
The greater the absolute value of ‘b’, the flatter the demand curve
Example: Chocolate bars
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Suppose the demand function for chocolate bars is
Qd = 14 - 2P.
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If the parameter of ‘b’ changes to -4, how will this affect the graph of the new demand curve?
As the absolute value of the new slope is greater than that of the original demand curve (4 > 2), the new demand curve will be flatter than the original demand curve (as shown in the graph above)
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