8/10/12 lecture 3
Law of demand:
Others things being equal, the higher the price of a good, the lower is the quantity demanded. What we mean by this is these are things we hold constant so as not to get confused by the effects of other things. So when we look at the effects of price we don’t want any other confounding factors (such as the ones named below) to move at the same time. So we say the higher the price the lower the quantity demanded keeping other things constant. ( this is where I can use ceteris paribus in essays)
For example bottle of wine sold for £ 10,000 quantity of which was 1.
Example one person would buy 1 cup of coffee for £50. In order to attract other buys you would have to keep lowering the cost of coffee.
If shown on a graph this would trace out the demand curve, basically buy reducing the price the demand become greater. Demand curve is quantity demanded.
What drives this is people subjective, point of view, values, tastes. This comes back to value judgement.
(Lecture Power Point note) – Other things being equal (Latin term Ceteris paribus) such as- price of subjective, price of complements, tastes, advertising, income. Ignoring the demand curve if you were to inject more of the good into the market the price would naturally drop in order to sell the surplus. Ceteris paribus basically meaning if all things stayed the same the demand curve or the supply curve would stay the same.
Price is not the only thing that affects someone decision to buy a cup of coffee but the price of something else for example tea this is a substitute. For some people tea is a good substitute, if the price is lowered enough people will switch from coffee to tea. Price of related goods: meaning substitutes so tea is a sub for coffee. Also on the topic of substitute as the price of something rises there will be more and more incentive to see if there is a cheaper option for example the sub of tea for coffee.
Also complements, complements are things that go with other things so for example if you like coffee with cream, how keen you are to buy the coffee will partly depend on how available cream is to go with the coffee, this is a complement.
This is also affected by income so if you have more money you might by more coffee.
Demand in Britain if there are more people there will be more demand. Britain has grown quiet rapidly in the last 10 ten years, so we would expect demand to be more than it was.
Preferences: are preferences constant or do they change, preferences can change with knowledge for example if something is advertised as being bad for you, you might not buy it anymore so demand will fall.
General function form:
Which is demand quantity is some function of: price of substitutes, price of complements, tastes, advertising( so if something is advertised as being bad for you) and income. Basically saying it can express these influences as a function:
D = D(P, Ps, Pc, T, A, I) where P = price Ps = price of substitutes Pc= price of complements T = tastes A = advertising I = income
Movement along the demand curve versus a shift in demand or a movement in demand.
(Lecture Power Point Note)
Along the demand curve all other things are held the same except the price and the quantity demanded.
If one or more of these other things changes, there will be a change in demand, or a shift in the demand curve.
A change in demand means that one of the factors has changed causing a shift in the demand which can be reflected on the graph by a movement of the demand curve. A factor such as advertising.
The shift can be negative or positive.
For example if there is a change in advertising and it is successful then at the same price as before more will be demanded equalling a new relationship between