BUSFF019 Lecture 3 - Demand (Economics) PDF

FASS Foundation Programmes BUSFF019 ELEMENTARY ECONOMICS & MATHEMATICAL SKILLS Lecture 3 Demand 1  OUTLINE 3.1 Demand & law of demand 3.2 Demand schedule & demand curve 3.3 Quantity demanded vs demand 3.4 Factors that change dema...

FASS Foundation Programmes BUSFF019 ELEMENTARY ECONOMICS & MATHEMATICAL SKILLS Lecture 3 Demand 1  OUTLINE 3.1 Demand & law of demand 3.2 Demand schedule & demand curve 3.3 Quantity demanded vs demand 3.4 Factors that change demand 3.5 Price elasticity of demand 2  LEARNING OBJECTIVES 1 2 3 Explain the Derive market Distinguish meaning of demand between demand & the quantity law of demanded & demand demand 4 5 6 Aware of Explain the Measure & causes of factors that interpret the movement change price elasticity along & shift demand of demand of demand curve 3  Demand  Demand for a good - the amount of the good consumers are able & willing to buy at various prices over a given period of time  Demand - not merely a wish/desire  Reflects a decision about which wants to satisfy  Reflects people’s ability & willingness to purchase the goods  effective demand  A flow concept - expressed as units demanded over a period of time (not at a point in time) 4 3.1 Price & quantity demanded To determine relationship between quantity demanded of a good & the good’s price, all other factors that may influence demand must be held constant - ceteris paribus All else equal/constant Other things being equal If everything else were to remain the same 5 Law of demand Law of demand - inverse relationship between price & quantity Q demanded P d When the price of a good rises, the quantity demanded will fall  The higher the price of the good, the __________ is the quantity demanded.  The lower the price of the good, the __________ is the quantity demanded. 6 Why higher price will reduce quantity demanded? People will feel poorer Income Purchasing power of income effect falls The good is now more expensive relative to other Substitution goods effect Consumers switch to substitutes 7 Milk Tea (per month) RM10 RM14 10 cups 7 cups RM12 8 cups 8  Demand schedule & demand curve Demand schedule  Table recording quantities demanded at different prices Demand curve  Graphical representation of demand schedule  Downward-sloping curve (negative slope)  Price is on the vertical axis  Quantity is on the horizontal axis Market demand curve  Horizontal sum of the individual demand curves for the good  Add the quantities demanded by all 9 3.2 individuals at each price Demand schedule & demand curve Pric Quantity e demanded ($) (per month) 6 6 8 4 10 2 10  Market demand curve Suppose there are only 2 individuals in the market (A & B). Given the individual demand curves, derive the market demand curve. P P P ($) ($) ($) 4 4 4 2 2 2 DA DB DM 0 4 6 Q 0 5 10 Q 0 9 16 Q Individual Individual Market A’s B’s demand demand demand curve 11 curve curve  Quantity demanded vs demand Quantity demanded A point on the demand curve The amount consumers are able & willing to buy at a given price Demand Entire demand curve The amount consumers are able & willing to buy at every possible price 12 3.3 Change in quantity demanded  A movement along the demand curve  Caused by only 1 factor: change in price of the good P What causes a movement P1 b from point a to point b? a P0 c P2 D What causes a movement Q1 Q0 Q2 Q from point a to point c? 13 Change in demand  A shift in the entire demand curve Increase in demand - _____________ shift in demand curve (e.g. from ____ to ____ ) Decrease in demand - _____________ shift in demand curve (e.g. from ____ to ____ ) P D2 D0 D1 Q 14 Increase in demand If demand increases by 2 units per month: P Price Quantity ($) demanded ($) (per month) 10 6 6 8 4 8 10 2 6 D1 4 D0 Price Quantity ($) demanded 2 (per month) 6 8 0 2 4 6 8 Q 8 6 15 10 4 Decrease in demand If demand decreases by 2 units per month: Price Quantity P ($) demanded ($) (per month) 10 6 6 8 4 8 10 2 6 4 D0 Price Quantity 2 D2 ($) demanded (per month) 6 4 0 2 4 6 8 Q 8 2 16 10 0  Factors that change demand 1 Price of related goods 2 Income 3 Tastes/preferences 4 Expected future price 5 Size/structure of population 17 3.4  1) Price of related goods a) Substitutes (competitive ods) Goods that can be used in place of another. If A & B are substitutes: Increase in PA leads to __________ in demand for B. Fall in PA leads to __________ in demand for B. 18  Japanese car or Korean car? When PJ d QJ DJ ∆ DK 19  Which electric car? When PT d QT DT ∆ DB 20  1) Price of related goods b) Complements (complementary ods) Goods that are used/consumed together. If A & B are complements: Increase in PA leads to __________ in demand for B. Fall in PA leads to __________ in demand for B. 21  Tennis racket & tennis ball When Pr d Qr Dr ∆ Db 22 Badminton racket & shuttlecock When Pr d Q Dr ∆ Db r 23 Exercise 1 If price of tea rises, how will this affect the demand for coffee? Illustrate your answer with appropriate diagrams. P P Q Q Tea Coffee 24 Exercise 2 Using appropriate diagrams, explain how a fall in price of cars will affect the demand for petrol. 25 2) Income A good whose demand Normal rises as people’s good income rise Movie tickets A good whose demand Inferior falls as people’s good incomes rise Bus ride 26 2) Income When people’s income rises: Demand for inferior Demand for goods falls normal goods rises 27 3) Taste/preferences Change in taste in favour of a good __________ the demand for the good. When the taste shifts away from the good, the demand for it __________. 28 4) Expected future price If price of a good is expected to rise in the future, current demand for the good _____________. If price of a good is expected to fall, current demand for it _____________. 29 5) Size/structure of population Population growth raises the number of potential buyers and therefore the demand for most goods & services would ____________. Age structure & gender composition may also affect the demand for certain products. College Denture Cosme Nursery Razors places cleanser tics 30 30  Exercise 3 (a) If a country is enjoying high economic growth, how do you think this will affect the demand for air travel? What about the demand for second hand clothing? (b) Assuming nail polish is a recent fashion, what would happen to the demand for nail services? (c) There are rumours that petrol prices will further increase by 10 pounds per litre tomorrow. How will this affect current demand for petrol? 31  Exercise 3 (d) Owing to an ageing population, what would happen to the demand for health care services? (e) If there is a baby boom, how will this affect the demand for baby products? 32  Exercise 4 Explain how the following events, considered independently, might affect the demand for diamonds in Malaysia: 1) Drastic increase in the number of robberies and snatch thefts in the country. 2) Recession in the Malaysian economy. 3) Higher income taxes are imposed. 4) Prices of diamonds are expected to increase significantly next month. 33 Past Test Question 2022-2023 Will the following events increase or decrease the demand for higher education in a country? Consider each event independently. 1) Rise in course fees of foreign universities 2) Rise in cost of living in the country 3) Decrease in minimum working age 4) Decrease in interest rate on education loan (10 marks) 5) Extension of compulsory military 34 service from 1 year to 2 years  Price elasticity of demand  The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. Qd  Formula: Price Percentage change in quantity elasticity = demanded change in price Percentage of demand Pє %∆QD P D = %∆P The Greek epsilon The capital Greek delta 35 3.5 Measuring price elasticity of demand If a 40% rise in the price of oil caused the quantity demanded to fall by a 10%, the price elasticity of oil will be: %∆QD -10% = = -0.25 %∆P 40% If a 5% fall in the price of cabbages caused a 15% rise in the quantity demanded, the price elasticity of cabbages will be: %∆QD 15% = = -3 %∆P -5% 36 Bases for calculating percentage change I. Using initial value as the base: %∆QD %∆P Q2 – Q1 P2 – P 1 = X 100% = X 100% Q1 P1 II. Using average/midpoint as the base: %∆QD %∆P Q2 – Q1 P2 – P 1 = X 100% = X 100% (Q1 + Q2)/2 (P1 + P2)/2 37 Calculating percentage change When price of a good drops from £9 to £5, the quantity demanded increases from 5 to 7. I. Using initial value as the base: %∆QD %∆P Q2 – Q1 P2 – P 1 = X 100% = X 100% Q1 P1 7–5 £5 – £9 = X 100% = X 100% 5 £9 2 X 100% -£4 = = X 100% 5 £9 = 40% = -44% 38 Calculating percentage change When price of a good drops from £9 to £5, the quantity demanded increases from 5 to 7. II. Using average/midpoint as the base: %∆QD %∆P Q2 – Q1 P2 – P 1 = X 100% = X 100% (Q1 + Q2)/2 (P1 + P2)/2 7–5 £5 – £9 = X 100% = X 100% (5 + 7)/2 (£9 + £5)/2 2 X 100% -£4 = = X 100% 6 £7 = 33% = -57% 39 Measuring price elasticity of demand %∆QD Price elasticity of demand, PєD = %∆P I. Using initial value as the base for percentages: 40% = -0.91 -44% II. Using average/midpoint as the base for percentages: 33% = -0.58 -57% 40 Interpreting elasticity Where interpreting the figure for elasticity, ignore the negative sign, just concentrate on the absolute value of the figure 41 Elasticity of demand A change in price causes a Inelastic proportionately smaller change demand in the quantity demanded PєD < 1 Customers are insensitive to a change in price Unit elastic demand Price and quantity change by the same proportion PєD = 1 A change in price causes a Elastic proportionately larger change in demand the quantity demanded PєD > 1 Customers are very sensitive to a change in price 42  Exercise 5 1) If elasticity figure of A is -0.3, it tells us that if prices were increased by 1%, quantity demanded will fall by ____%. 2) If elasticity figure of B is -5, it tells us that if prices were increased by 10%, quantity demanded will fall by ____%. 3) If elasticity figure of C is -1, it tells us that if prices were increased by 22%, quantity demanded will fall by ____%. 4) The demand for ____ (A, B or C) is elastic. 5) The demand for ____ is inelastic. 43  Check Your Moodle Understanding Indicate whether each of the following statements is true (T) or false (F). 1. The law of demand states that, if nothing else changes, as the price of a good rises, the quantity demanded decreases. 2. "An increase in demand" means a movement down and rightward along a demand curve. 3. If consumers expect the price of bags to rise, there will be an increase in the demand for bags today. 4. A decrease in income decreases the demand for all products. 44  Check Your Understanding 5. An inferior good is one for which an increase in income causes an increase in demand. 6. If mangoes and papayas are substitutes, an increase in the price of mangoes will decrease the demand for papayas. 7. If badminton rackets and shuttlecocks are complements, a decrease in the price of badminton rackets will increase the demand for shuttlecocks. 8. If consumer tastes shift toward the consumption of jackfruit seeds, the demand curve for jackfruit seeds will shift rightward. 45  Check Your Understanding 9. The larger the magnitude of the price elasticity of demand, the greater is the responsiveness of the quantity demanded to a given price change. 10.Using the midpoint method to calculate price elasticity of demand, if an increase in the price of pens from £0.20 to £0.40 reduces the quantity demanded from 300 pens to 150 pens, the demand for pens is unit elastic. Score: /10 ( %) 46  READINGS Economics, Sloman, Garratt & Guest, 11th ed. Chapter 2: Supply and Demand Economics, Michael Parkin, 14th ed. Chapter 3: Demand and Supply Principles Chapter 4: Elasticity of Economics, Case, Fair & Oster, 13th ed. Chapter 3: Demand, Supply, and Market Equilibrium Chapter 5: Elasticity 47 Extra Exercises Source: http://cws.cengage.co.uk/mankiw_taylor2/students/stu_mcqs.htm Economics, 2nd Edition, N. Gregory Mankiw & Mark P. Taylor (Students’ Resources) Chapter 4: The Market Forces of Supply and Demand True/False 5 questions: 3-6 & 12 Multiple Choice 5 questions: 17, 18, 20, 22 & 35 Chapter 5: Elasticity and Its Applications True/False 4 questions: 1, 2, 5 & 8 Multiple Choice 4 questions: 16, 17, 31 & 35 48