1. DEMAND SIDE MICROECONOMICS PRICE QUANTITY

2. Terms to know Market Economy – System in which the consumers and firms make all economic decisions Demand Schedule – A table that lists how much of a product consumers will buy at all possible prices Demand Curve – Curve (line) that shows the quantities demanded at all possible prices Law of Demand – Rule stating that consumers will buy more of a product at lower prices and less at higher prices Market Demand Curve – Curve that shows how much of a product all consumers will buy at all possible prices Marginal Utility – Additional satisfaction a consumer gets from having one more unit of a product Diminishing Marginal Utility – Decrease in satisfaction from having one more unit of the same product

3. WHAT, HOW AND FOR WHOM? ONLY TWO VARIABLES ARE USED IN DETERMINING DEMAND 1. Price 2. Quantity

4. Demand Schedule Price Of A CDQuantity Demanded for that CD $300 $250 $201 $153 $105 $58

5. DEMAND CURVE P P=PRICE Q=QUANTITY Q

6. Understanding the Curve Price Quantity D1 How do we get the demand curve to look the way it does? The higher the price the less quantity you would purchase. Demand Curve should ALMOST ALWAYS look something like this.

7. LAW OF DEMAND The inverse relationship (demand goes up when prices go down) is almost a given Common sense and simple observation are consistent with this concept

8. Market Demand Curve Individual Demand Curve Group or Market Demand Curve P P Q Q MD1 D1

9. Utility Marginal Utility The reason we buy a product is because we feel it will be useful Having that Krispy Kreme Donut hmmmmmmmm!!!!!! Diminishing Marginal Utility The extra satisfaction we get from using or obtaining that additional product is not as beneficial Having your 12 th Krispy Kreme Donut AUGGGGGGGGGGGGHHH!

10. Factors of Demand

11. Quantity Demanded Change in QD – Is a movement ALONG the demand curve What Causes these changes – Income – Substitution Effect Increase in quantity demanded Decrease in quantity demanded

12. Income Effect Prices of Goods Drop = More disposable income Disposable means “extra” This happens only when the change occurs in the price of the product

13. Example: IPods are widely available so the cost of CDs went from $15 to $10 per CD. As a consumer you were willing to buy 6 CDs at the $15 price range but now you are willing to buy 10 for $10. Point A means you spent $90 (6 X $15) By dropping the price to $10 you would spend $60 (6 X$10) which gives you a $30 surplus in cash to either buy more CDs or to spend on something else A B

14. Substitution Effect The idea of finding something that is cheaper to replace the more expensive item Whenever the price changes and it affects how much you would buy it is a quantity change and a shift along the curve.

15. Change in Demand Factors that change the demand curve without the price changing. This causes the entire demand curve to shift. – Consumer Income – Consumer Tastes – Substitutes – Complements – Expectations – Number of Consumers

16. What Happens? Decrease in demand Increase in demand D1 D2

17. Consumer Tastes What can change tastes: Advertising Fashion Trends Different Seasons Example: As a product becomes more popular more people want that item and buy more of it and the opposite is true if less popular. Think of Toyota cars D1 D2

18. Substitution An item that can be used instead of another item and give the same results Example: – MySpace was a hugely successful social networking site. When FaceBook came unto the scene and became more popular people started to leave MySpace. D1 D2

19. Complement When one good can effect the use of another Example: – Play Station and games. If the price of the Play Station goes down people would buy more games to complement it.

20. Expectations What consumers feel could happen to a product Example: A new technological break through in TV (Think 3D) Some consumers may hold off buying a TV until that new technology is available

21. Number of Consumers Changes in the amount of people that determine the market demand curve Example: If more people entered the market for new cars it would change the average and shift the curve

23. Demand Elasticity Three Types of Elasticity – Elastic Demand When change in price causes a relatively larger change in quantity demanded – Inelastic Demand Change in price causes a relatively smaller change in quantity demanded – Unit Elastic Demand Change in price causes a proportional change in quantity demanded

24. Elastic Demand Expenditure $6=$3 per 2 units

25. Inelastic Demand Expenditure: $6=$3 per 2 units

26. Unit Elastic Demand Expenditure: $6=$3 per 2 units Expenditure: $6=$2 per 3 unites

27. Determining Elasticity Type of DemandElasticInelasticUnit Elastic Change in Price Change in Expenditure No Change

28. Determinants of Demand Elasticity 1.Can the purchase be delayed? 2.Are adequate substitutes available? 3.Does the purchase use a large portion of income?

29. Example of Products Determinates of Elasticity If yes: E If no: IE Fresh Veggies Table Salt Gas from BP Gas in general Services of medical doctors InsulinButter Can it be delayed? Adequate Substitutes? Large portion of income? Type Yes No Yes Elastic Inelastic