Production possibilities, specialization, and change
Supply and demand
Circular flow
Econ 1 – ELEMENTS OF ECONOMICS 1
LECTURE NOTES
Foster, UCSD
13May09
A. Consumer and Market Demand
1.
Individual Consumer Demand Functions and Curves:
a)
Definition of demand.
b)
An individual consumer's demand function for a commodity X:
x
d
= d(P
x
,
P
o
, y; tastes and preferences), where:
o
x
d
= quantity of good X demanded per time period (units)
o
P
x
= price of X ($)
o
P
o
= [P
a
, P
b
, … ] = list of prices of other related commodities A, B, etc. ($)
o
y = consumer’s income or budget per time period ($)
The above equation is using d(x) like f(x) as a 11 function
P
x
is the yaxis and x
d
is the xaxis
c)
If we examine the relation between x
d
and P
x
,
ceteris paribus
(
i.e.
, holding all other
influences
P
o
, y, and tastes/preferences constant at some level), we get x
d
= d(P
x
).
A
table of this relationship is a demand schedule
; a graph (with P on the vertical axis) is a
demand curve
.
d)
Example.
2.
The Law of Demand:
a)
Negative relationship between x
d
and P
x
,
cet. par.
J. Burns Beer Demand
Price
($/can)
Demand
(cans/wk)
$0.00
$0.25
$0.50
$0.75
$1.00
40
29
24
16
8
d
P
$1.00
$0.75
$0.50
$0.25
0
10
20
30
40
X
Fig. 1
Beer Demand
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DEMAND/SUPPLY/ELASTICITY
p. 2
1)
As P rises (falls), x
d
falls (rises).
2)
Algebraically,
∆
x
d
/
∆
P
x
< 0.
3)
In other words, demand curve slopes down.
b)
Reason  income and substitution effect
of price change.
[Table 1]
1)
When price of apples is $1 each,
family buys 100/year at total apple
expenditure of $100.
When price
drops to $0.70, family increases quantity demanded to 131/year.
2)
Income effect
 At new price, family can buy old quantity for $70, having $30 left
over.
This is like a $30 increase in income, which can be spent on a variety of com
modities, including apples.
Suppose they buy 10 more apples.
This is the income
effect of the price change.
3)
Substitution effect
 Apples are now cheaper than before, so the family buys fewer
bananas and oranges and more apples.
Say they substitute 21 more apples for other
kinds of fruit.
This is the substitution effect of the price change.
c)
Law of demand and the inverse demand function.
1)
We usually write x
d
= d(P
x
), where x
d
is quantity demanded of good X and P
x
is its
price.
But we draw demand curves with price on vertical axis and quantity on the
horizontal.
2)
Actually, we are graphing an inverse demand function expressing P
x
in terms of x
d
:
P
x
= d
1
(x
d
) = p(x
d
)
3.
Changes in Quantity Demanded vs. Changes in Demand:
[Fig. 2]
4.
Why Demand Curves Shift:
a)
Changes in income.
1)
Normal – if an increase in y increases the demand for X, then X is “normal.”
2)
Inferior – if an increase in y decreases the demand for X, then X is “inferior.”
b)
Changes in price of other related commodities.
Table 1
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 Spring '08
 Vandehey

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