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 tacos were less than p0? How do you show the effect on demand?AN IMPORTANT POINTOther factors affecting demandSlide 13Normal and inferior goods definedPizza is a normal good.Suppose instead that pizza was an inferior good.Substitutes definedThe graph shows the demand curve for spaghetti when pizzas cost $10 each.Complements definedThe graph shows the demand curve for beer when pizzas cost $10 each.The graph shows the demand curve for umbrellas on sunny days.DEMAND SUMMARYDemand 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.Demand 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)Demand slide 3YOU COULD WRITE THE MODEL THIS WAY:The demand for tacosQD(tacos) = D(Ptacos, Income, Pspaghetti, Pbeer, tastes)Demand slide 4ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENT VARIABLE AFFECT THE AMOUNT DEMANDEDDemand 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.Demand 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.Demand slide 7A DEMAND CURVEA demand curve must look like this, i.e., be negatively sloped.own pricequantity demandeddemandMarket for tacosDemand 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 tacosDemand slide 9What if the price of tacos were less than p0?How do you show the effect on demand?Go to hidden slideDemand 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.Demand slide 12Other factors affecting demandThe question here is how to show the effects of changes in income, other goods’ prices, and tastes on demand.Demand 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 beerdemand @ I = $1000Market for beerHow does this affect the demand curve?How does this affect the demand curve?$1/canGo to hidden slideDemand 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.Demand slide 16Pizza is a normal good. own pricequantitydemand @ I = $1000Market for pizzaWhat’s the effect on the demand curve for pizza if income risesto $2,000?What’s the effect on the demand curve for pizza if income risesto $2,000?Go to hidden slideDemand slide 18Suppose instead that pizza was an inferior good.own pricequantitydemand @ I = $1000Market for pizzaWhat’s the effect on the demand curve for pizza if income risesto $2,000?What’s the effect on the demand curve for pizza if income risesto $2,000?Go to hidden slideDemand 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 pizza would increase the demand for spaghetti if the goods were substitutes.Demand slide 21The graph shows the demand curve for spaghetti when pizzas cost $10 each.own pricequantitydemand @ pizza price of $10Market for spaghettiWhat’s the effect of an increase in the price of pizza to $15?What’s the effect of an increase in the price of pizza to $15?Go to hidden slideDemand 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 pizza would decrease the demand for beer if the goods were complements.Demand slide 24The graph shows the demand curve for beer when pizzas cost $10 each.price of beerquantitydemand @ pizza price of $10Market for beerWhat is the effect on the market for beer of an increase in the price of pizza to $15?What is the effect on the market for beer of an increase in the price of pizza to $15?Go to hidden slideDemand 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 slideDemand 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, and tastes show up as shifts in the demand