1. Demand
Chapter 4: Demand

2. Demand Demand means the willingness and capacity to pay.
Prices are the tools by which the market coordinates individual desires.

3. The Law of Demand
Law of demand – there is an inverse relationship between price and quantity demanded.
Quantity demanded rises as price falls, other things constant.
Quantity demanded falls as prices rise, other things constant.

4. Demand in Output Markets
A demand schedule is a table showing how much of a given product a household would be willing to buy at different prices.
Demand curves are usually derived from demand schedules.

5. The Demand Curve
The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.

6. The Law of Demand
The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price.
This means that demand curves slope downward.

7. Demand vs. Quantity Demanded
Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time.
The quantity demand is the amount of a product that people are willing and able to purchase at one, specific price.

8. Change in Quantity Demanded
Price (per unit)
Quantity demanded (per unit of time)
100 $2 $1
200 B
Change in quantity demanded
(a movement along the curve) A D1

9. Shifts in Demand Versus Movements Along a Demand Curve
A shift in demand is the graphical representation of the effect of anything other than price on demand.

10. A Change in Demand Versus a Change in Quantity Demanded
When demand shifts to the right, demand increases. This causes quantity demanded to be greater than it was prior to the shift, for each and every price level.

11. Shifts of the Demand Curve
An “increase in demand” means a rightward shift of the demand curve: at any given price, consumers demand a larger quantity than before. (D1D2)
A “decrease in demand”, means a leftward shift of the demand curve: at any given price, consumers demand a smaller quantity than before. (D1D3)
Price
Increase in demand
Figure Caption:
Figure 3-4: Shifts of the Demand Curve
Any event that increases demand shifts the demand curve to the right, reflecting a rise in the quantity demanded at any given price. Any event that decreases demand shifts the demand curve to the left, reflecting a fall in the quantity demanded at any given price.
Decrease in demand D D D 3 1 2
Quantity

12. Shift Factors of Demand
Shift factors of demand are factors that cause shifts in the demand curve:
Society's income.
The prices of other goods.
Tastes.
Expectations.
Number of Buyers
Taxes on subsidies to consumers.
Temporary change in the economy

13. Related Goods and Services
Substitutes are goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up. Perfect substitutes are identical products.
Complements are goods that “go together”; a decrease in the price of one results in an increase in demand for the other, and vice versa.

14. The Impact of a Change in the Price of Related Goods
Demand for complement good (ketchup) shifts left
Demand for substitute good (chicken) shifts right
Price of hamburger rises
Quantity of hamburger demanded falls

15. The Impact of a Change in Income
Higher income decreases the demand for an inferior good
Higher income increases the demand for a normal good

16. An Increase in Demand
An increase in the population and other factors generate an increase in demand – a rise in the quantity demanded at any given price.
This is represented by the two demand schedules - one showing demand in 2002, before the rise in population, the other showing demand in 2006, after the rise in population.
Demand Schedules for Coffee Beans
Quantity of coffee beans demanded (billions of pounds)
Price of coffee beans (per pound)
in 2002
in 2006
$2.00
7.1
8.5
1.75
7.5
9.0
1.50
8.1
9.7
1.25
8.9
10.7
1.00
10.0
12.0
0.75
11.5
13.8
0.50
14.2
17.0

17. An Increase in Demand Increase in population  more coffee drinkers
Price of coffee beans (per gallon)
$2.00
Increase in population 
more coffee drinkers 2
1.75
Demand curve in 2006
1.50
1.25
1.00
0.75
Demand curve in 2002
0.50 D D 1
Figure Caption:
Figure 3-2: An increase in demand
An increase in the population and other factors generate an increase in demand—a rise in the quantity demanded at any given price. This is represented by the two demand schedules—one showing demand in 2002, before the rise in population, the other showing demand in 2006, after the rise in population—and their corresponding demand curves. The increase in demand shifts the demand curve to the right. 7 9 11 13 15 17
Quantity of coffee beans (billions of pounds)
A shift of the demand curve is a change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve.

18. What Causes a Demand Curve to Shift?
Changes in Income
Normal Goods: When a rise in income increases the demand for a good - the normal case - we say that the good is a normal good.
Inferior Goods: When a rise in income decreases the demand for a good, it is an inferior good.

19. A Change in Demand Versus a Change in Quantity Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded (Movement along the curve).
Change in income, preferences, or prices of other goods or services
leads to
Change in demand (Shift of curve).

20. From Household to Market Demand
Demand for a good or service can be defined for an individual household, or for a group of households that make up a market.
Market demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

21. Individual Demand Curve and the Market Demand Curve
The market demand curve is the horizontal sum of the individual demand curves of all consumers in that market.
(a)
Darla’s Individual Demand Curve
(b)
Dino’s Individual Demand Curve
(c)
Market Demand Curve
Price of coffee beans (per pound)
Price of coffee beans (per pound)
Price of coffee beans (per pound) $2 $2 $2 D
Market 1 1 1
Figure Caption:
Figure 3-5: Individual Demand Curves and the Market Demand Curve
Darla and Dino are the only two consumers of coffee beans in the market. Panel (a) shows Darla’s individual demand curve: the number of pounds of coffee beans she will buy per year at any given price. Panel (b) shows Dino’s individual demand curve. Given that Darla and Dino are the only two consumers, the market demand curve, which shows the quantity of coffee demanded by all consumers at any given price, is shown in panel (c). The market demand curve is the horizontal sum of the individual demand curves of all consumers. In this case, at any given price, the quantity demanded by the market is the sum of the quantities demanded by Darla and Dino. D D
Darla
Dino 20 30 10 20 30 40 50
Quantity of coffee beans (pounds)
Quantity of coffee beans (pounds)
Quantity of coffee beans (pounds)

22. Elasticity . . .
… allows us to analyze supply and demand with greater precision.
… is a measure of how much buyers and sellers respond to changes in market conditions

23. THE ELASTICITY OF DEMAND
Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.

24. Determinates of Demand Easticity
Can the purchase be delayed?
Are Adequate Substitutes Available?
Does the Purchase Use a Large % of Income?

25. The Price Elasticity of Demand and Its Determinants
Demand tends to be more elastic :
the larger the number of close substitutes.
if the good is a luxury.
if the purchases represents a large portion of income.

26. Computing the Price Elasticity of Demand
The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.

27. Computing the Price Elasticity of Demand
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as:

28. The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities
*The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.

29. The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand, using the midpoint formula, would be calculated as:

30. The Variety of Demand Curves
Inelastic Demand
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one.
Elastic Demand
Quantity demanded responds strongly to changes in price.
Price elasticity of demand is greater than one.

31. The Variety of Demand Curves
Perfectly Inelastic
Quantity demanded does not respond to price changes.
Perfectly Elastic
Quantity demanded changes infinitely with any change in price.
Unit Elastic
Quantity demanded changes by the same percentage as the price.

32. Income Elasticity of Demand
Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
It is computed as the percentage change in the quantity demanded divided by the percentage change in income.

33. Income Elasticity
Goods consumers regard as necessities tend to be income inelastic
Examples include food, fuel, clothing, utilities, and medical services.
Goods consumers regard as luxuries tend to be income elastic.
Examples include sports cars, furs, and expensive foods.