Law of Demand.docx

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University of Calgary
Business and Environment
BSEN 401
William Huddleston

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) 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 = $3,000/month) 15 21 32 48 69 Price ($s) 5 4 3 2 D1 1 Do 10 60 20 30 40 50 Quantity (kilos) 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. Inferior Good: In
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