1. The Economics of Demand
CONTEMPORARY ECONOMICS
3/31/2017
The Economics of Demand
The Demand Curve
Elasticity of Demand
Changes in Demand
LESSON 4.1

2. Consider
Demand
Why are newspapers sold in vending machines that allow you to take more than one copy?
How much do you eat when you can eat all you want?
What cures ‘spring fever’?
What economic principle is behind the saying, “Been there, done that”?
Why do higher cigarette taxes cut smoking by teens more than by other age groups?

3. Explain the law of demand Interpret a demand schedule and demand curve
Objectives
The Demand Curve
Explain the law of demand
Interpret a demand schedule and demand curve

4. Key Terms The Demand Curve demand law of demand marginal utility
law of diminishing marginal utility
demand curve
quantity demanded
individual demand
market demand

5. Demand
Demand indicates how much of a product consumers are both willing and able to buy at each possible price during a given period, other things remaining constant.

6. Law of Demand
The law of demand says that quantity demanded varies inversely with price, other things constant. Thus, the higher the price, the smaller the quantity demanded.

7. Law of Demand Demand, wants, and needs Substitution effect
The change in the relative price (the price of one good relative to the prices of other goods) causes the substitution effect
If all prices changed by same margin, there would be no substitution effect
Income effect
Money income – the number of dollars you receive per period
Real income – measure in terms of how many goods and services you can buy
Diminishing marginal utility
Marginal utility – additional satisfaction you derive from each item
Law of marginal utility you derive from each additional item consumed decreases as your consumption increases (example: pizza slices)

8. Demand Schedule and Demand Curve
Demand versus quantity demanded
Individual demand
Market demand

9. Demand Schedule a $15 8 b 12 14 c 9 20 d 6 26 e 3 32
Price Quantity Demanded
per Pizza per Week (millions)
a $15 8
b 12 14
c 9 20
d 6 26
e 3 32

10. Demand Curve for Pizza 8 14 20 26 32 Millions of pizzas per week $1512 9 6 3
Price per pizza a b c d e D

11. Individual Demand for Pizzas
$12 8 4
Price 1 2 3
Pizzas (per week)
(a) Hector
$12 8 4 1 2
(b) Brianna
$12 8 4 1
(c) Chris d H d B d C

12. Market Demand for Pizzas
$12 8 4
Price 1 2 3
Pizzas (per week)
(d) Market demand for pizzas 6 d H B C D + =

13. CONTEMPORARY ECONOMICS
3/31/2017
Objectives
Elasticity of Demand
Compute the elasticity of demand and explain its relevance.
Discuss factors that influence elasticity of demand.
LESSON 4.1

14. Computing the Elasticity of Demand
CONTEMPORARY ECONOMICS
3/31/2017
Computing the Elasticity of Demand
Elasticity of demand measures the percentage change in quantity demanded divided by percentage change in price.
Elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
LESSON 4.1

15. Computing Elasticity of Demand
Elasticity values
>1 it is elastic
Percentage change in price will result in larger percentage change in the quantity demanded
=1 it is unit-elastic
<1 it is inelastic
Demand is usually more elastic at higher prices and less elastic with lower prices
Elasticity and total revenue
Price x’s quantity demanded at that price

16. The Demand for Pizza 8 14 20 26 32 Millions of pizzas per week $15 129 6 3
Price per pizza D

17. Determinants of Demand Elasticity
Availability of substitutes
The greater the availability of substitutes for a good, the greater the good’s elasticity of demand
Share of consumer’s budget spent on the good
Increase in prices reduced the demand because people are not both willing and able to higher prices
A matter of time
The longer the adjustment period, the greater the consumer’s ability to substitute
Some elasticity estimates
The elasticity of demand is greater in the long run because consumers have more time to adjust

18. Demand Becomes More Elastic Over Time50 75 95
100
Millions of gallons per day
$1.25
1.00
Price per gallon D w D m D y

19. Selected Elasticities of Demand
Product
Short Run
Long Run
Electricity (residential)
0.1
1.9
Air travel
2.4
Medical care and hospitalization
0.3
0.9
Gasoline
0.4
1.5
Movies
3.7
Natural gas (residential)
1.4
2.1

20. Other Determinants of Demand
Consumer Income
The prices of related goods
The number and composition of consumers
Consumer expectations
Consumer tastes

21. Changes in Consumer Income
If income ↑, consumers willing and able to buy more which ↑ demand
Demand curve shifts to the right
Two categories of goods:
Normal goods – demand increases as money income increases
Inferior goods – demand decreases as money income increases
Examples: used clothing, bus rides, etc.

22. Changes in the Prices of Related Goods
Substitutes
Decrease in price of one item will reduce the demand for a substitute
Example: Tacos and Pizza
Complements
Certain goods used together
Example: airline tickets and car rentals
A decrease in the price of one shifts the demand of the other rightward

23. Changes in Prices of Related Goods (cont)
Changes in size or composition of the population will increase demand and shift the curve to the right
Changes in consumer expectations can shift the demand curve to the left or the right
Changes in consumer tastes
Tastes are your likes and dislikes as a consumer

24. Movement along the Curve
Movement vs. Shift
A change in price, causes a movement along the demand curve, changes the quantity demanded
A change in one of the determinants of demand other than price causes a shift of a demand curve

25. Extensions of Demand Analysis
Role of time
Your willingness to pay more for time-saving goods depends on the opportunity cost of your time!