MODEL OF DEMANDTHE “STANDARD” MODEL OF DEMANDYOU COULD WRITE THE MODEL THIS WAY:PowerPoint PresentationTHE DEMAND CURVETHE LAW OF DEMANDA DEMAND CURVEThe demand curve means:What if the price of lemon-lime were less than p0? How do you show the effect on demand?AN IMPORTANT POINTOther factors affecting demandSlide 13Normal and inferior goods definedLemon-lime is a normal good.Suppose instead that lemon-lime was an inferior good.Substitutes definedThe graph shows the demand curve for lemon-lime when colas cost $1 each.Complements definedThe graph shows the demand curve for lemon-lime when peanuts cost $2 each.The graph shows the demand curve for umbrellas on sunny days.DEMAND SUMMARYTitleDemand slide 1MODEL OF DEMANDThe model of demand is an attempt to explain the amount demanded of any good or service. DEMAND DEFINEDThe amount of a good or service a consumer wants to buy, and is able to buy per unit time.TitleDemand slide 2THE “STANDARD” MODEL OF DEMANDThe DEPENDENT variable is the amount demanded.The INDEPENDENT variables are:the good’s own pricethe consumer’s money incomethe prices of other goodspreferences (tastes)expectationsTitleDemand slide 3YOU COULD WRITE THE MODEL THIS WAY:The demand for lemon-limeQD(lemon-lime) = D(Plemon-lime, Income, Ppeanuts, Pcola, tastes, expectations)TitleDemand slide 4ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENT VARIABLE AFFECT THE AMOUNT DEMANDEDTitleDemand slide 5THE DEMAND CURVEThe 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.TitleDemand slide 6THE LAW OF DEMANDThe 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.TitleDemand slide 7A DEMAND CURVEA demand curve must look like this, i.e., be negatively sloped.own pricequantity demandeddemandMarket for lemon-limeTitleDemand slide 8The demand curve means:You pick a price, such a p0, and the demand curve shows how much is demanded.own pricequantity demandeddemandp0Q0Market for lemon-limeTitleDemand slide 9What if the price of lemon-lime were less than p0?How do you show the effect on demand?Go to hidden slideTitleDemand slide 11AN IMPORTANT POINTWhen drawing a demand curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis.TitleDemand slide 12Other factors affecting demandThe question here is how to show the effects of changes in income, other goods’ prices, and tastes on demand.TitleDemand slide 13Suppose 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 pricequantity of lemon-limedemand @ I = $1000Market for lemon-limeHow does this affect the demand curve?How does this affect the demand curve?$1/canGo to hidden slideTitleDemand slide 15Normal and inferior goods definedNormal good: When an increase in income causes an increase in demand.Inferior good: When an increase in income causes a decrease in demand.TitleDemand slide 16Lemon-lime is a normal good. own pricequantitydemand @ I = $1000Market for lemon-limeWhat’s the effect on the demand curve for lemon-lime if income risesto $2,000?What’s the effect on the demand curve for lemon-lime if income risesto $2,000?Go to hidden slideTitleDemand slide 18Suppose instead that lemon-lime was an inferior good.own pricequantitydemand @ I = $1000Market for lemon-limeWhat’s the effect on the demand curve for lemon-lime if income risesto $2,000?What’s the effect on the demand curve for lemon-lime if income risesto $2,000?Go to hidden slideTitleDemand slide 20Substitutes definedSubstitutes: 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 cola would increase the demand for lemon-lime if the goods were substitutes.TitleDemand slide 21The graph shows the demand curve for lemon-lime when colas cost $1 each.own pricequantitydemand @ cola price of $1Market for lemon-limeWhat’s the effect of an increase in the price of cola to $1.50?What’s the effect of an increase in the price of cola to $1.50?Go to hidden slideTitleDemand slide 23Complements definedComplements: 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 peanuts would decrease the demand for lemon-lime if the goods were complements.TitleDemand slide 24The graph shows the demand curve for lemon-lime when peanuts cost $2 each.price of lemon-limequantitydemand @ peanuts price of $2Market for lemon-limeWhat is the effect on the market for lemon-lime of an increase in the price of peanuts to $3?What is the effect on the market for lemon-lime of an increase in the price of peanuts to $3?Go to hidden slideTitleDemand slide 26The graph shows the demand curve for umbrellas on sunny days.price of umbrellasquantitydemand on sunny daysMarket for umbrellasWhat’s the effect on demand ofit being a rainy day?What’s the effect on demand ofit being a rainy day?Go to hidden slideTitleDemand slide 28DEMAND SUMMARYDemand 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, expectations, and tastes show up as shifts in the demand