DEMAND

What is demand? Demand effects everything from ‘A’ Apples

What is demand? TO Z Zebras

Demand is one side of the well- known economic “equation” of supply and demand. An economic phenomenon

Demand does not reflect what households want or need. Demand reflects only what households are WILLING and ABLE to pay for.

DEMAND REFERS TO THE QUANTITES OF A GOOD THAT CONSUMERS ARE WILLLING AND ABLE TO PURCHASE AT VARIOUS PRICES DURING A GIVEN PERIOD OF TIME

LAW of DEMAND HUMAN NATURE

LAW of DEMAND As the prices of a good rises, the quantity demanded by consumers fall As the price of a good decreases the quantity demanded rises

LAW of DEMAND

Demand There are THREE economic concepts that explain the Law of Demand and these concepts account for the inverse relationship that changes in the price of goods/services have on the quantity demanded: Income/ Purchasing Power Effect Substitution Effect Diminishing Marginal Utility

Income/Purchasing Power Effect Amount of money a person has to spend on goods/services called purchasing power. It is not a change in a person’s income but a change in purchasing power (real income) because of a change in the good/service. Pr. Pur.Pwr.QD Pr. Pur.Pwr.QD

Income/Purchasing Power Effect Either a lot of $$$$$$$ OR No $$$$$$$$$$$

Substitution Effect To substitute a lower priced product/service (generic) for a normal product/service that is more expensive. Price A (NORMAL) If there is a substitute than the quantity demanded of that normal good will decrease. QD What happens if there is not a substitute?

Substitution Effect

Diminishing Marginal Utility What is UTILITY? The usefulness of a good/service or the satisfaction one gets from that good/service. As the price of a good/service decreases, the quantity demanded increases, but for each successive decrease in price, the quantity demanded will increase but at a smaller rate. You will get to a point where the quantity demanded will reach zero- at that point you have no more utility for that good/service. D.M.U.

Diminishing Marginal Utility

A Change in Demand Review- Change in the Quantity of Demand A CHANGE IN PRICE! Income Effect Substitution Effect Diminishing Marginal Utility *Just a SNAPSHOT- ONLY PRICE MATTERS- Ceteris Paribus

QUANTITY DEMANDED The amount consumed/purchased of a G/S at a specific price at a given time

QUANTITY DEMANDED

CHANGE IN PRICE IS MOVEMENT ALONG THE CURVE

DEMAND

Demand schedule This is a numerical representation of the inverse relationship between specific relative prices and quantity demanded. Demand curve This is a graphic representation of the demand schedule. A negatively sloped line showing the inverse relationship between relative price and quantity demanded.

DEMAND CHANGE IN PRICE IS MOVEMENT ALONG THE CURVE

SHIFT HAPPENS Determinants of Demand

A SHIFT IN A DEMAND CURVE MEANS THAT AT EVERY PRICE, CONSUMERS BUY A DIFFERENT QUANTITY THEN BEFORE Determinants of Demand

Shifts in Demand The Determinants of Demand D1D1 Q/Units Increase – Right Shift D2D2 D3D3 Decrease –Left Shift Price

A Change in Demand A change in the quantity that people plan to buy when any influence other than the price of the good changes. There is a new demand schedule and a new demand curve. This shift in the demand curve causes an overall change in the level (quantity) of demand at each and every price.

Determinants of Demand FACTORS THAT SHIFT THE DEMAND CURVE Change in consumer tastes and preferences Change in the number of buyers/population Change in consumer incomes ( ↑ or ↓) Change in the prices of complementary and substitute goods—Relative Goods Change in consumer expectations (future)

DEMAND Taste and preferences of consumers Related goods prices (complements and substitutes) Income of buyers* Buyers (number of /population: increase/decrease) Expectations for the future

Understanding Shifts of the Demand Curve Increase = right, Decrease = left M.E.R.I.T. shifts demand Market size (number of consumers) Expectations Related prices (complements, substitutes) Income (normal, inferior) Tastes

*Types of Goods Inferior Normal Superior

*Types of Goods Inferior –tap water Normal –bottled water Superior –sparkling water

A SHIFT IN A DEMAND CURVE MEANS THAT AT EVERY PRICE, CONSUMERS BUY A DIFFERENT QUANTITY THEN BEFORE

Change in Quantity Demand vs. Change in Demand

 When you draw a shift of the demand, be careful to draw the arrows in the horizontal direction.  Follow the text by always describing shifts of demand and supply curves as “rightward” or “leftward.” Do not say that the curves shift “up” or “down” or “inward” or “outward.”

CHANGE IN PRICE IS MOVEMENT ALONG THE CURVE A SHIFT IN A DEMAND CURVE MEANS THAT AT EVERY PRICE, CONSUMERS BUY A DIFFERENT QUANTITY THEN BEFORE

DEMAND MOVEMENT and SHIFT