Model of demand
The INDEPENDENT variables are:
the good’s own pricethe consumer’s money incomethe prices of other goodspreferences (tastes)
YOU COULD WRITE THE MODEL THIS WAY:
QD(tacos) = D(Pmangos, Income, Pspaghetti, Pbeer, tastes)
ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH INDEPENDENTVARIABLE AFFECT THE AMOUNT DEMANDED
THE DEMAND CURVE
The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand.
The DEPENDENT variable
The DEPENDENT variable is the quantity demanded.The INDEPENDENT variable is the good’s own price.
THE LAW OF DEMAND
The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinantsof demand.
The Law of Demand says that demand curves are negatively sloped.
When drawing a demand curve notice that the axes are reversed from the usual convention of putting thedependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis.
Normal and inferior goods definedNormal good: When an increase in income causes an increase in demand.Inferior good: When an increase in income causes a decrease in demand.
Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other.Thus, an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other.Thus, an increase in the price of pizza would decrease the demand for beer if the goods were complements.NoteDemand is a function of own-price, income, prices of other goods, and tastes.The demand curve shows demand as a function of a good's own price, all else constant.Changes in own priceshow up as movements along a demand curve.Changes in income, prices of substitutes and complements, and tastes show up as shifts in the demand curve.