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Lecture

BSEN 401 Lecture Notes - Ceteris Paribus, Margarine, Inferior Good


Department
Business and Environment
Course Code
BSEN 401
Professor
William Huddleston

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Law of Demand: ((Qx/Px < 0 or dQx/dPx < 0 for Qx = quantity of x and Px = price of x)
The Law of Demand says that an increase in price causes a decrease in quantity demanded
and a decrease in price causes an increase in quantity demanded.
(The change in Qx in response to the change in Px is less than zero)
=> A Demand curve is negatively sloped.
The negative slope can be linear, concave, or convex. I will usually draw convex demand
functions but use linear demand functions for calculations.
Positive sloped demand functions can exist but are rare. Some positively sloped demand
functions are called Giffen goods.
NOTE. Do not confuse Demand and Quantity Demanded. Quantity demanded is the quantity
response to one price whereas Demand is the set of all the prices and quantities.
Perhaps the most common mistake in economics is the statement that the Demand for a
commodity (e.g., gas) falls because of a rise in the price of the commodity. A fall in the
price of a commodity causes a rise in the quantity demanded of the commodity (movement
along the demand curve) but the demand curve itself does not change.
A change in one of the ceteris paribus conditions, however, does change Demand.
CHANGES IN DEMAND (shifts in the Demand Curve)
Factors other than the price of a commodity affected the quantity demanded of a
commodity. Changes in these variables change the Demand function, not merely the quantity
demanded, since the price of the commodity need not change. We now look at the most
common variables affecting Demand.
1. Income
a) Normal Good: Demand is positively related to Income (Qd/Y > 0 or dQd/dY > 0)
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An increase/decrease in the consumer’s income normally results in an increase in quantity
demanded at every given price of a commodity. Suppose that the consumer’s income was
$2,000/month in our ground beef example above. The table and graph below show the effect on
Demand of an increase in income to $3,000 month.
Price
$5
$4
$3
$2
$1
Quantity (Income = $2,000/month)
10
15
25
40
60
Quantity (Income = $3,000/month)
15
21
32
48
69
a) Inferior Good: Demand is inversely related to Income (Qd/Y < 0 or dQd/dY < 0)
Some goods are called ‘inferior’ because an increase (decrease) in income causes a decrease
(increases) in Demand, i.e., a decrease (increase) in quantity demanded at every price. An
inferior good is a poorer quality good purchased by a consumer with relatively low income
because it is affordable. An increase in income causes the consumer to buy more preferred
normal goods and less inferior goods. Students, for example, go to pizza joints rather than better
restaurants or use the TTC rather than a car.
Example: Suppose that margarine is an inferior good (relative to butter) for a consumer. An
increase in income causes the consumer to buy more butter and less margarine at any price of
margarine.
Price ($s)
Quantity (kilos)
Do
1
2
5
3
4
60
30
10 20 40 50
D1
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