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03 - Law of Demand
03 - Law of Demand
What we measure in demand is a reflection of individual desires. Daniel Bernoulli, a mathematical genius who lived in Basel, noted, in 1738, that people seek goodness or pleasure (utility). That is, we do not seek cellphones because they are cellphones but because they are useful and give us pleasure. Use and pleasure cannot be measured, only approximated. This is behind the law of demand.
Like all scientific propositions, it is a ceteris paribus (other things equal or other things constant) statement
Note the terminology: - Price means opportunity cost - Good means anything people value
Expectations
Also difficult to measure but important
When measurable, include in the analysis. But experience showsmeasures are very poor predictors of actions. Like tastes, these can be used to explain anything
Dont fall into this trap
This or that?
Substitutes:
Essentially, goods used in place of each other same geographic market; similar performance characteristics. What is a substitute in one market may not be seen by consumers as such in another marketorange juice and orange soda. Different brands of gasoline; robots in Renault factory in France v. workers in Renault factory in Russia (former Lada) paid $200 a month; movie theater v. movie rentals; corn or sugar in ethanol.
Related Goods
Complements:
Essentially, goods used together Computer hardware and software; tennis balls and rackets; airplane travel and hotel rooms; Google maps and discount coupons; growing corn for ethanol and Deere tractors
direction
Changes in Income
Normal Goods:
Change in income changes demand in same direction
- Higher income causes increase in demand - Lower income causes decrease in demand Superior good is a variant: change in demand due to income change is quite large
Inferior goods:
Change in income changes demand in opposite
direction - Higher income causes decrease in demand - Lower income causes increase in demand
Terminology:
Changes in demand:
Caused by changes in other factors:
- Prices of other goods - Income - Expectations, etc. Means a shift of the entire demand curve
Change in Price
Qa
Qb
Quantity/time
Change in Demand
A change in a factor that determines demand, besides the price of the good itself, causes the Demand curve to shift. Example: Increase in price of substitute or increase in income causes an increase in demand.
Price
Da
Pa Db
Qa
Qb
Quantity/time
Demand
.28 0 9 13 19
29 Quantity
5.
Wine and beer. Domestic shirts and imported shirts. Oil from Iran and coal from China. Paper and pencils. Plate glass and brick/concrete
Demand analysis
1.
2. 3.
How would demand for hair replacement be likely to change if the following occurs? A fall in the price of hairpieces. A rise in income. A rise in the divorce rate.
A British cellphone company promised new subscribers in November and December that all calls on Christmas Day, December 25, would be free. What would you expect happened to the volume of calls that day?
Trying to predict future demand, GE research showed that the average size of the American family was declining and so was the average square footage of houses. How would you think this impacted the demand for the design of, say, refrigerators?