MECO 6303 Business Economics

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MECO 6303 Business Economics

• Lesson Two
• Demand and Supply
• Part A
• The Theory of Demand

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In this lesson we will investigate the following

• Supply and Demand
• Demand
• Law of Demand.
• Movement of Curve vs. movement along curve.
• Ceteris Paribus assumption.
• Supply
• Upward Sloping.
• Movement of Curve vs. movement along curve.
• Ceteris Paribus assumption.
• Equilibrium (competitive)
• Shortages and Surpluses.
• Using supply and demand to predict prices and
  quantities and other applications

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Defining Demand

• Definition The amount demanded is the amount
  that would be purchased of a particular product
  at a particular price at a particular time, all
  other relevant things constant.
• Refers to the hypothetical ability and
  willingness to purchase
• Desire without purchasing power is irrelevant
• It is all hypothetical - equi-temporal -
  alternative hypothetical points at the same point
  in time.

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All Other Relevant Things Constant(the ceteris
paribus conditions)

• What are they?
• Tastes (what does this mean?)
• Income
• Other related prices
• Substitutes Coke and Pepsi.
• Complements cars and gasoline.
• Expectations
• With this in mind, lets draw a demand curve.

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Constructing a demand curveOne Individual
Price
Price is on the vertical axis, quantity the
horizontal the reverse of the usual
mathematical convention.
P1
1
2
P2
Individual demand curve
Quantity Demanded
0
Q2
Q1
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From the individual to the market
Price
1 2 n
1 2
1
0
Quantity demanded
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The Law of Demand

• What is the law?
• The demand curve slopes down
• When the price is lower people buy more (no
  less) when the price is higher people buy less
  (no more).

Demand Curve
0
8
What kind of law is this?

• A combination of logic and knowledge of human
  nature
• What is the law?
• The demand curve slopes down ?? at a higher price
  consumers will not buy more at a lower price
  consumers will not buy less.
• More simply at a higher price consumers will buy
  less at a lower price consumers will buy more
• Other things constant !!!

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Time is importantTime enters-in in three
different ways.

• No one has ever seen a demand curve why not?
• Multiple hypothetical points at a single moment
  in time (now) or out of real time.
• Does this mean it does not exist? (Has anyone
  seen an atom?)
• Demand can be a stock or a flow
• Flow ? quantity per period of time apples per
  day Q/t
• Stock ? quantity at a point of time all the
  paintings of Picasso Q
• The longer the time (real time) to react the
  flatter the demand curve (the more elastic over
  any price range). here we are talking about a
  subtly different demand curve.

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A Shift in Demand

• So when something relevant changes, we have to
  draw another curve for example an increase in
  demand may be caused by
• an increase in income
• a change in (increased intensity of) tastes
• an increase in the price of a substitute
• a decrease in the price of a complement.

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An Increase in Demand
P
0
Q
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It is important to keep the terminology straight.

• Its a matter of cause and effect.
• A change in the amount demanded refers to a
  movement along a demand curve
• A change in price causes a change in the amount
  (quantity) demanded.
• A change in demand refers to a movement (shift)
  of the (whole) demand curve.
• A change in something else (income, related
  prices, tastes, expectations, etc.) causes a
  change in both the price and the quantity
  demanded.

End of Part A