Econ 201
Lecture 2.1
Consumer Demand Theory
Ceteris Paribus
10-5-2010
Overview
• Individual and Market Demand Curves
• Factors that Shift Demand Curves
• More useful websites
From the Demand Side
• First Law of Demand
– What Does Law Of Demand
Mean?
– all other factors being equal, as
the price of a good or service
increases, consumer demand for
the good will decrease and vice
versa.
– http://www.investopedia.com/ter
ms/l/lawofdemand.asp
Shift of the Entire Curve
• Shift out/right of the Demand Curve
– WTP increases for all Qd
• Shift in/left of the Demand Curve
– WTP decreases for all levels of Qd
Shift out/right
Shift in/left
D2
Factors That Can Shift Demand
• Individual and Market Demand Curves
– Income
– Price of Substitutes
– Price of Compliments
– Product Quality
– Future Prices
– Taste and Preferences
• Market Demand Curves
– Population (market)
Factors That Can Shift Demand
• Income
– Normal good
• As income rises, quantity demanded increases at a
given price -> Demand curve shifts out
• Superior good – percent of budget spent on good
increases more than percent increase in income
– Demand curve shift is very large
– Inferior good
• As income rises, quantity demanded decreases at
a given price
– Demand curve shifts in
Factors That Can Shift Demand
• Substitutes
– Goods that are similar to the “good in question” (or
being analyzed)
• E.g., Pepsi/Coke
• Shifts in Demand Curve
– If price of substitute increases, then demand for “GIQ”
shifts out as it becomes relatively less expensive
– If price of substitute decreases, then demand for
“GIQ” shifts in as it becomes relatively more
expensive
– “closer” the substitute -> more demand curve shifts
(i.e., greater cross-price elasticity)
– For substitutes: relative price matters!
Factors That Can Shift Demand
• Complements
– Goods that are “jointly consumed” with “GIQ”, e.g.
coffee & cream
• Demand Curve shifts
– Price of complement increases, then demand for
“GIQ” shifts in as total cost of consumption has
increased
– Price of complement decreases, then demand for
“GIQ” shifts out as total cost of consumption has
decreased
– For complements: total cost of consumption matters!
Factors That Can Shift Demand
• Product Quality
– Better or improved product quality increases (relative) demand
• Demand curve shifts out
• Future price (hedge market) of the good
– If the price is expected to go up in the future -> increases current
demand (shift out/right)
• Cheaper to consume today and stockpile
– If the price is expected to decrease in the future -> decrease
current demand (shift in/left)
• Wait to buy (christmas/after christmas sales)
• Taste and Preferences
– Always assumed constant unless you have empirical proof (new
MRI imaging)
Factor that Affects the ONLY
Aggregate Market Demand Curve
• As the population/number of buyers (Nb)
increases -> Market Demand curve shifts
outward
Market Demand:
Maybe a little bit different
• Market Demand may be kinked as new
buyers enter at different price points
When it’s only Tom – Tom’s D is the market
Harry joins the Market
Dick joins
Table 4.1
Factors That Shift the Demand
Curve
Key Assumptions
Demand Curve
• For a given (individual’s) demand curve
– These factors are held constant (ceteris paribus):
• Price of:
– substitutes,
– complements,
– future price of the good
• income,
• quality, and
• taste and preferences
• And for a market demand curve:
– number of buyers (Nb)
• Only price and quantity demanded are
allowed to vary
A Short Quiz
Seattle Times Oct 3, 2007
Olympic National Park officials are suggesting raising the price of an entrance pass
for motorists — good for seven days — from $15 to $25 starting in 2009, with the
fee for individuals such as cyclists climbing from $5 to $12. Season passes would
increase from $30 to $50
But public response, particularly from tourist-dependent local businesses has been
generally negative said a spokeswoman for Olympic National Park.
1.
Illustrate the effect of the increase of the price for park passes on
the demand for trips to the park
2.
Illustrate how the park fee increase would affect the demand for
other tourist-related businesses, e.g., hotels, restaurants.
What We’ve Learned
• Buy rule for consumers (Qd: P=MV)
– Consumers will buy x units up to the point that price
equals MV for the last (xth) unit
• First law of demand: demand curves are downward sloping
• Negative slope  diminishing marginal value of consuming
next unit
Useful Websites
– Understanding differences between factors
that cause shifts in demand or supply
• http://hspm.sph.sc.edu/COURSES/ECON/SD/SD.h
tml
– Basics of demand and supply
• http://www.investopedia.com/university/economics/
economics3.asp
– Cobweb theorem
• http://www.bized.co.uk/current/mind/2004_5/25100
4.ppt