Demand and Supply Model

Topic 2: Demand and Supply Model

2.1 Demand

Market and Model Outline

  • Market: A mechanism facilitating the exchange of goods or services between buyers and sellers.

    • Buyers: As a group, they determine the demand for a product.

    • Sellers: As a group, they determine the supply of a product.

  • Demand and Supply Model: This model is fundamentally based on a specific market structure known as a perfectly competitive market.

Perfectly Competitive Market Characteristics

For the demand and supply model to apply, the market must exhibit the following characteristics:

  • Many Buyers and Sellers: A large number of participants on both sides, ensuring no single entity can influence market prices significantly.

  • Identical Goods: The product sold in the market is homogenous, meaning consumers perceive all units of the good as perfect substitutes for one another.

  • Price Takers: All participants (buyers and sellers) in the market accept the prevailing market price as given; they have no power to set prices.

  • No Barriers to Entry: New firms can freely enter or exit the market without significant obstacles.

Definition of Demand

  • Demand: Represents the relationship between the price of a particular good and the quantity demanded by buyers, other things equal (ceteris paribusceteris~paribus).

  • Quantity Demanded (QdQd): Refers to the specific amount of a good that buyers are both willing and able to purchase at a given price.

  • Demand Schedule: A tabular representation that systematically displays the quantity demanded at various price levels.

  • Demand Curve: A graphical representation of the demand schedule.

    • Vertical axis: Always represents Price (PP).

    • Horizontal axis: Always represents Quantity (Demanded) (QQ or QdQd).

Example: Demand Schedule and Demand Curve

Consider the example of ice-cream cones:

Price of Ice-Cream Cone

Quantity of Cones Demanded

0.000.00

1212 cones

0.500.50

1010 cones

1.001.00

88 cones

1.501.50

66 cones

2.002.00

44 cones

2.502.50

22 cones

3.003.00

00 cones

  • This table shows that as the price decreases, the quantity demanded increases.

  • When graphed, this relationship forms a downward-sloping demand curve, illustrating the inverse relationship between price and quantity demanded.

Law of Demand

  • Statement: Other things equal (ceteris paribusceteris~paribus), the quantity demanded of a good falls when its price rises, and conversely, the quantity demanded rises when its price falls.

  • Relationship: Price and quantity demanded are negatively or inversely related.

Market Demand as the Sum of Individual Demands

  • Concept: The total quantity demanded in a market at any given price is the aggregate sum of the quantities demanded by all individual buyers at that same price.

  • Derivation: The market demand curve is derived by horizontally summing the individual demand curves of all buyers.

  • Example: If at a price of 2.002.00:

    • Catherine demands 44 ice-cream cones.

    • Nicholas demands 33 ice-cream cones.

    • The market quantity demanded at 2.002.00 is 4+3=74 + 3 = 7 cones.

Price of Ice-Cream Cone ()</p></th><thcolspan="1"rowspan="1"style="text−align:left;"><p>QdbyCatherine</p></th><thcolspan="1"rowspan="1"style="text−align:left;"><p>QdbyNicholas</p></th><thcolspan="1"rowspan="1"style="text−align:left;"><p>Qd(Market)</p></th></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p>)</p></th><th colspan="1" rowspan="1" style="text-align: left;"><p>Qd by Catherine</p></th><th colspan="1" rowspan="1" style="text-align: left;"><p>Qd by Nicholas</p></th><th colspan="1" rowspan="1" style="text-align: left;"><p>Qd (Market)</p></th></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>0.00</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>12</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>7</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>19</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>0.50</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>10</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>6</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>16</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>1.00</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>8</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>5</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>13</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>1.50</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>6</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>4</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>10</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>2.00</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>4</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>3</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>7</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>2.50</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>2</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>2</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>4</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>3.00</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>0</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>1</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>1</p></td></tr></tbody></table><h5id="b9b42016−60d4−4b9a−b7bd−7be928e889df"data−toc−id="b9b42016−60d4−4b9a−b7bd−7be928e889df"collapsed="false"seolevelmigrated="true">ShiftsinDemand</h5><p>Changesinfactors<em>otherthanthegood′sownprice</em>willcausetheentiredemandcurvetoshift.</p><ul><li><p><strong>IncreaseinDemand</strong>:Anyeventorchangethatleadstoagreaterquantitydemandedateverypossibleprice.</p><ul><li><p>Graphicallyrepresentedasa<strong>rightwardshift</strong>ofthedemandcurve.</p></li></ul></li><li><p><strong>DecreaseinDemand</strong>:Anyeventorchangethatleadstoasmallerquantitydemandedateverypossibleprice.</p><ul><li><p>Graphicallyrepresentedasa<strong>leftwardshift</strong>ofthedemandcurve.</p></li></ul></li></ul><h5id="0baf9447−2011−4235−9021−ff5bc16a5d68"data−toc−id="0baf9447−2011−4235−9021−ff5bc16a5d68"collapsed="false"seolevelmigrated="true">FactorsThatShifttheDemandCurve</h5><p>Thesearethe<em>otherthings</em>that,whentheychange,causethedemandcurvetoshift:</p><ol><li><p><strong>NumberofBuyers(Population)</strong></p><ul><li><p>Anincreaseinthenumberofbuyers(e.g.,populationgrowth)<strong>increasesmarketdemand</strong>(shiftsright).</p></li><li><p>Adecreaseinthenumberofbuyers<strong>decreasesmarketdemand</strong>(shiftsleft).</p></li></ul></li><li><p><strong>Income</strong></p><ul><li><p><strong>NormalGood</strong>:Formostgoods,<em>otherthingsconstant</em>,anincreaseinincomeleadstoan<strong>increaseindemand</strong>(shiftsright).Conversely,adecreaseinincomeleadstoadecreaseindemand.</p></li><li><p><strong>InferiorGood</strong>:Forsomegoods,<em>otherthingsconstant</em>,anincreaseinincomeleadstoa<strong>decreaseindemand</strong>(shiftsleft).Conversely,adecreaseinincomeleadstoanincreaseindemand.</p></li></ul></li><li><p><strong>PricesofRelatedGoods</strong></p><ul><li><p><strong>Substitutes</strong>:Twogoodsaresubstitutesifanincreaseinthepriceofonegoodleadstoan<strong>increaseinthedemandfortheothergood</strong>.</p><ul><li><p><em>Example</em>:Ifthepriceofcoffeerises,thedemandfortea(asubstitute)mightincrease.</p></li></ul></li><li><p><strong>Complements</strong>:Twogoodsarecomplementsifanincreaseinthepriceofonegoodleadstoa<strong>decreaseinthedemandfortheothergood</strong>.</p><ul><li><p><em>Example</em>:Ifthepriceofhotdogsrises,thedemandforhotdogbuns(acomplement)mightdecrease.</p></li></ul></li></ul></li><li><p><strong>Tastes(orPreferences)</strong></p><ul><li><p>Afavorablechangeinconsumertastesforagoodwill<strong>increasedemand</strong>(shiftsright).</p></li><li><p>Anunfavorablechangeintasteswill<strong>decreasedemand</strong>(shiftsleft).</p></li></ul></li><li><p><strong>ExpectationsAbouttheFuture</strong></p><ul><li><p><strong>ExpectationofFutureIncomeIncrease</strong>:Ifconsumersexpecttheirincometoincreaseinthenearfuture,theymight<strong>increasetheircurrentdemand</strong>forcertaingoods(shiftsright).</p></li><li><p><strong>ExpectationofHigherFuturePrices</strong>:Ifconsumersexpectthepriceofagoodtoriseinthefuture,theymight<strong>increasetheircurrentdemand</strong>forthatgoodtobuyitbeforethepricegoesup(shiftsright).</p></li><li><p><strong>ExpectationofLowerFuturePrices</strong>:Ifconsumersexpectthepriceofagoodtofall,theymight<strong>decreasetheircurrentdemand</strong>,preferringtowaitforthelowerprice(shiftsleft).</p></li></ul></li></ol><h5id="56d61f83−110a−493e−8a25−24b761a72de8"data−toc−id="56d61f83−110a−493e−8a25−24b761a72de8"collapsed="false"seolevelmigrated="true">SummaryofVariablesAffectingQuantityDemanded</h5><tablestyle="min−width:100px;"><colgroup><colstyle="min−width:25px;"><colstyle="min−width:25px;"><colstyle="min−width:25px;"><colstyle="min−width:25px;"></colgroup><tbody><tr><thcolspan="1"rowspan="1"style="text−align:left;"><p>Variable</p></th><thcolspan="1"rowspan="1"style="text−align:left;"><p>EffectofaChangeinThisVariable</p></th><thcolspan="1"rowspan="1"style="text−align:left;"><p>ImpactonDemandCurve</p></th><thcolspan="1"rowspan="1"style="text−align:left;"><p>Explanation</p></th></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p><strong>Priceofthegooditself</strong></p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Changesquantitydemanded</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p><strong>Movement<em>along</em>thedemandcurve</strong></p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>ThisisthedirectrelationshipdefinedbytheLawofDemand.Onlyachangeinthegood′sownpricecausesmovementalongtheexistingcurve.</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Income</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Changesdemand</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p><strong>Shiftsthedemandcurve</strong></p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Affectspurchasingpowerandpreferencesfornormalvs.inferiorgoods.</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Pricesofrelatedgoods</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Changesdemand</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p><strong>Shiftsthedemandcurve</strong></p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Affectsconsumerchoicesbetweensubstitutesandcomplements.</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Tastes</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Changesdemand</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p><strong>Shiftsthedemandcurve</strong></p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Directlyaltershowmuchconsumersdesireagood.</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Expectations</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Changesdemand</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p><strong>Shiftsthedemandcurve</strong></p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Futureoutlooksonpricesorincomeinfluencecurrentpurchasingdecisions.</p></td></tr><tr><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Numberofbuyers</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Changesdemand</p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p><strong>Shiftsthedemandcurve</strong></p></td><tdcolspan="1"rowspan="1"style="text−align:left;"><p>Determinestheoverallscaleofmarketdemandbyaggregatingindividualdemands.</p></td></tr></tbody></table><h5id="0879df85−9c21−4d8f−abaf−08b02d9ea3f7"data−toc−id="0879df85−9c21−4d8f−abaf−08b02d9ea3f7"collapsed="false"seolevelmigrated="true">ExamplesandPracticeQuestions</h5><p><strong>Question1</strong>:Giventwoequations:</p><ol><li><p></p></td></tr></tbody></table><h5 id="b9b42016-60d4-4b9a-b7bd-7be928e889df" data-toc-id="b9b42016-60d4-4b9a-b7bd-7be928e889df" collapsed="false" seolevelmigrated="true">Shifts in Demand</h5><p>Changes in factors <em>other than the good's own price</em> will cause the entire demand curve to shift.</p><ul><li><p><strong>Increase in Demand</strong>: Any event or change that leads to a greater quantity demanded at every possible price.</p><ul><li><p>Graphically represented as a <strong>rightward shift</strong> of the demand curve.</p></li></ul></li><li><p><strong>Decrease in Demand</strong>: Any event or change that leads to a smaller quantity demanded at every possible price.</p><ul><li><p>Graphically represented as a <strong>leftward shift</strong> of the demand curve.</p></li></ul></li></ul><h5 id="0baf9447-2011-4235-9021-ff5bc16a5d68" data-toc-id="0baf9447-2011-4235-9021-ff5bc16a5d68" collapsed="false" seolevelmigrated="true">Factors That Shift the Demand Curve</h5><p>These are the <em>other things</em> that, when they change, cause the demand curve to shift:</p><ol><li><p><strong>Number of Buyers (Population)</strong></p><ul><li><p>An increase in the number of buyers (e.g., population growth) <strong>increases market demand</strong> (shifts right).</p></li><li><p>A decrease in the number of buyers <strong>decreases market demand</strong> (shifts left).</p></li></ul></li><li><p><strong>Income</strong></p><ul><li><p><strong>Normal Good</strong>: For most goods, <em>other things constant</em>, an increase in income leads to an <strong>increase in demand</strong> (shifts right). Conversely, a decrease in income leads to a decrease in demand.</p></li><li><p><strong>Inferior Good</strong>: For some goods, <em>other things constant</em>, an increase in income leads to a <strong>decrease in demand</strong> (shifts left). Conversely, a decrease in income leads to an increase in demand.</p></li></ul></li><li><p><strong>Prices of Related Goods</strong></p><ul><li><p><strong>Substitutes</strong>: Two goods are substitutes if an increase in the price of one good leads to an <strong>increase in the demand for the other good</strong>.</p><ul><li><p><em>Example</em>: If the price of coffee rises, the demand for tea (a substitute) might increase.</p></li></ul></li><li><p><strong>Complements</strong>: Two goods are complements if an increase in the price of one good leads to a <strong>decrease in the demand for the other good</strong>.</p><ul><li><p><em>Example</em>: If the price of hot dogs rises, the demand for hot dog buns (a complement) might decrease.</p></li></ul></li></ul></li><li><p><strong>Tastes (or Preferences)</strong></p><ul><li><p>A favorable change in consumer tastes for a good will <strong>increase demand</strong> (shifts right).</p></li><li><p>An unfavorable change in tastes will <strong>decrease demand</strong> (shifts left).</p></li></ul></li><li><p><strong>Expectations About the Future</strong></p><ul><li><p><strong>Expectation of Future Income Increase</strong>: If consumers expect their income to increase in the near future, they might <strong>increase their current demand</strong> for certain goods (shifts right).</p></li><li><p><strong>Expectation of Higher Future Prices</strong>: If consumers expect the price of a good to rise in the future, they might <strong>increase their current demand</strong> for that good to buy it before the price goes up (shifts right).</p></li><li><p><strong>Expectation of Lower Future Prices</strong>: If consumers expect the price of a good to fall, they might <strong>decrease their current demand</strong>, preferring to wait for the lower price (shifts left).</p></li></ul></li></ol><h5 id="56d61f83-110a-493e-8a25-24b761a72de8" data-toc-id="56d61f83-110a-493e-8a25-24b761a72de8" collapsed="false" seolevelmigrated="true">Summary of Variables Affecting Quantity Demanded</h5><table style="min-width: 100px;"><colgroup><col style="min-width: 25px;"><col style="min-width: 25px;"><col style="min-width: 25px;"><col style="min-width: 25px;"></colgroup><tbody><tr><th colspan="1" rowspan="1" style="text-align: left;"><p>Variable</p></th><th colspan="1" rowspan="1" style="text-align: left;"><p>Effect of a Change in This Variable</p></th><th colspan="1" rowspan="1" style="text-align: left;"><p>Impact on Demand Curve</p></th><th colspan="1" rowspan="1" style="text-align: left;"><p>Explanation</p></th></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p><strong>Price of the good itself</strong></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Changes quantity demanded</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p><strong>Movement <em>along</em> the demand curve</strong></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>This is the direct relationship defined by the Law of Demand. Only a change in the good's own price causes movement along the existing curve.</p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>Income</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Changes demand</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p><strong>Shifts the demand curve</strong></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Affects purchasing power and preferences for normal vs. inferior goods.</p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>Prices of related goods</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Changes demand</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p><strong>Shifts the demand curve</strong></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Affects consumer choices between substitutes and complements.</p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>Tastes</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Changes demand</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p><strong>Shifts the demand curve</strong></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Directly alters how much consumers desire a good.</p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>Expectations</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Changes demand</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p><strong>Shifts the demand curve</strong></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Future outlooks on prices or income influence current purchasing decisions.</p></td></tr><tr><td colspan="1" rowspan="1" style="text-align: left;"><p>Number of buyers</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Changes demand</p></td><td colspan="1" rowspan="1" style="text-align: left;"><p><strong>Shifts the demand curve</strong></p></td><td colspan="1" rowspan="1" style="text-align: left;"><p>Determines the overall scale of market demand by aggregating individual demands.</p></td></tr></tbody></table><h5 id="0879df85-9c21-4d8f-abaf-08b02d9ea3f7" data-toc-id="0879df85-9c21-4d8f-abaf-08b02d9ea3f7" collapsed="false" seolevelmigrated="true">Examples and Practice Questions</h5><p><strong>Question 1</strong>: Given two equations:</p><ol><li><p>P = 2500 - 0.25 Q</p></li><li><p></p></li><li><p>P = 1200 + 0.33 Q<br>Whichequationcouldrepresentademandfunction?Why?</p></li></ol><ul><li><p><strong>AnalysisFocus</strong>:Ademandfunctiontypicallyshowsanegativerelationshipbetweenprice(<br>Which equation could represent a demand function? Why?</p></li></ol><ul><li><p><strong>Analysis Focus</strong>: A demand function typically shows a negative relationship between price (P)andquantity() and quantity (Q).Whenoneincreases,theotherdecreases.Thecoefficientof). When one increases, the other decreases. The coefficient ofQinademandfunctionwhenin a demand function whenPisthedependentvariable(orviceversa)shouldreflectthisinverserelationship.</p></li></ul><p><strong>Question2</strong>:AmarketingresearchfirmderivedthefollowingequationforfirmAbasedonaresearchsurvey:<br>is the dependent variable (or vice versa) should reflect this inverse relationship.</p></li></ul><p><strong>Question 2</strong>: A marketing research firm derived the following equation for firm A based on a research survey:<br>Qd{A} = 4000 - 0.25 P{A} + 0.004 I + 0.004 P_{B}<br>where:</p><ul><li><p><br>where:</p><ul><li><p>P_{A}isthepriceofgoodA</p></li><li><p>is the price of good A</p></li><li><p>P_{B}isthepriceofarelatedgood</p></li><li><p>is the price of a related good</p></li><li><p>Iisaveragehouseholdincomebasedonthesurvey</p></li></ul><p><strong>2.1.Ifis average household income based on the survey</p></li></ul><p><strong>2.1. IfI = 40000andandP_{B} = 1000,derivethedemandfunctionforgoodAanddrawagraphtoshowit.</strong></p><ul><li><p><strong>AnalysisFocus</strong>:Substitutethegivenvaluesfor, derive the demand function for good A and draw a graph to show it.</strong></p><ul><li><p><strong>Analysis Focus</strong>: Substitute the given values forIandandP{B}intotheequationtosimplifyitintoarelationshipbetweeninto the equation to simplify it into a relationship betweenQd{A}andandP_{A}.Plottingthislinearfunctionrequiresidentifyingtheinterceptsorafewpoints.</p></li></ul><p><strong>2.2.IsgoodAanormalgoodoraninferiorgood?Why?</strong></p><ul><li><p><strong>AnalysisFocus</strong>:Examinethecoefficientofincome(. Plotting this linear function requires identifying the intercepts or a few points.</p></li></ul><p><strong>2.2. Is good A a normal good or an inferior good? Why?</strong></p><ul><li><p><strong>Analysis Focus</strong>: Examine the coefficient of income (I)inthedemandfunction() in the demand function (+0.004 I).Apositivecoefficientmeansthatasincomeincreases,demandincreases,indicatinganormalgood.Anegativecoefficientwouldindicateaninferiorgood.</p></li></ul><p><strong>2.3.AregoodAandgoodBcomplementsorsubstitutes?Why?</strong></p><ul><li><p><strong>AnalysisFocus</strong>:Examinethecoefficientofthepriceoftherelatedgood(). A positive coefficient means that as income increases, demand increases, indicating a normal good. A negative coefficient would indicate an inferior good.</p></li></ul><p><strong>2.3. Are good A and good B complements or substitutes? Why?</strong></p><ul><li><p><strong>Analysis Focus</strong>: Examine the coefficient of the price of the related good (P{B})inthedemandfunction() in the demand function (+0.004 P{B}$$). A positive coefficient means that as the price of good B increases, the demand for good A increases, indicating they are substitutes. A negative coefficient would indicate complements. A positive correlation typically means they are substitutes.