Demand Ch. 4 Economics Mr. Bennett

Micro v. Macro Microeconomics is the branch of economics that examines the choices of individuals concerning one product, one firm, or one industry. Macroeconomics is the branch of economics that examines the behavior of the whole economy at once.

What is Demand? Demand: the desire, ability, and willingness to buy a product. Factors of Demand: You must have the desire for the product You must be able to make a purchase You must be willing to make a purchase. Purchases have to be made during a given time period

The Law of Demand The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. Price goes up, quantity demanded goes down P ▲ QD ▼ Price goes down, quantity demanded goes up. P ▼ QD ▲

Demand Schedule & Curve A Demand Schedule is a list (table) of the quantities consumers demand at various prices. A Demand Curve is a graphic illustration of the relationship between price and the quantity demanded. A Market Demand Curve shows the quantities demanded by everyone who is interested in purchasing the product.

Demand Schedules & Curves

Everybody Curved – aka Market Curve Demand Curves A Demand Curve is a graphic illustration of the relationship between price and the quantity demanded. Typically 1 product or 1 consumer A market demand curve illustrates how the quantity that all interested persons (the market) will demand varies depending on the price of a good or service. Everybody Curved – aka Market Curve Individual Curve 

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

Demand Curve for Pizza 8 14 20 26 32 Millions of pizzas per week $15 12 9 6 3 Price per pizza a b c d e D

Individual Demand for Pizzas $12 8 4 Price 1 2 3 Pizzas (per week) (a) Person A $12 8 4 1 2 (b) Person B $12 8 4 1 (c) Person C d A d B d C

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

Demand and Marginal Utility Marginal utility is the amount of usefulness or satisfaction a person receives from a product. Think of that first sip of a drink when you’re thirsty The concept of diminishing marginal utility describes the satisfaction we gain from buying a product decreases as we buy more of the same product. Clothes, music, soda, food…?

Change in the Quantity Demanded The change in quantity demanded shows a change in the amount of a product purchased when there is a change in price. The graph shows: Inverse relationship between price & quantity demanded. Movement from point a to b shows a change in quantity demanded. Movement along the demand curve shows a change in the quantity purchased in response to a change in price.

Changes in Quantity Demanded The income effect means that as prices drop, consumers are left with extra real income. Vice versa: price goes up, consumers will have less $ The substitution effect means that price can cause consumers to substitute one product with another similar but cheaper item.

Change in Demand Sometimes people will decide to buy more or less of a product while the price of the product remains the same. This is called a change in demand. Factors Affecting Demand: Consumer Income Consumer Taste Substitute Products Complimentary Products Number of Consumers

Consumer Income Consumer Income If a person’s income increases, he or she can buy more products and demand grows. If income goes down, fewer products can be bought and demand decreases.

Changes in Consumer Tastes Consumers do not always want the same things. Advertising, news reports, fashion trends, new products, even the changing of seasons can affect Consumer Tastes. Sometimes Consumer Tastes can change by themselves overtime.

Change in Expectations Expectations refers to the way people think about the future and the purchasing decisions made with those expectations. Examples: New technology coming next year U.S.D.A. reports a major crop failure – more demand now!

Substitute Products Substitute Products are products that are similar enough that one can be used in place of other products When the price of a substitute decreases the demand for the original product decreases. The reason is that people will buy the substitute thus reducing demand for the original product. What are other reasons someone would choose a substitute product (other than price)?

Change in Demand – Substitute Products The movement (shift) in the graph shows the quantity demanded of butter decreased. What can we assume about the price of butter? What about the demand for margarine? Price?

Substitute Products Example: Spaghetti Sauce Prego vs. Ragu The demand for Prego goes down… Therefore what can you assume is happening? Price of Prego? Demand for Ragu? Price of Ragu?

Complementary Products Complementary Products are products that are used together or related goods where the use of one increases the use of the other What are some other examples of this?

How Demand Changes w/ Compliments Complementary products need to be viewed as a single item. If the price of one of the products rise the total cost of the pair rises. If one of the complements decreases in price the total price of the items decrease. For Example: If one of the complements decreases in price the demand for the complemented product increases.

Increase in Population Number of Consumers - When the population increases, more people are buying more products. The opposite applies as well… Population/Demand increases will shift the market demand curve to the right . A reduction in population (& subsequent demand) shifts the curve to the left .

Which of the following choices could cause the movement shown in this graph? a. a decrease in income. b. an increase in population c. an increase in the price of a substitute d. a decrease in the price of a complement

Which of the following choices could cause the movement shown in this graph? a. an increase in the price of Blu-ray discs b. a decrease in the price of Blu-ray discs c. an increase in the price of Blu-ray players d. a decrease in the price of Blu-ray players

Based on this graph, how many Beanie Babies™ were demanded at a price of $6 before they became a fad? a. 100 b. 200 c. 300 d. 400

Which of the following events could cause the movement shown in the graph? a. a decrease in income b. an increase in population c. a decrease in the price of a substitute d. an increase in the price of a complement

Elasticity of Demand Elasticity measures the relative responsiveness of the change in quantity demanded as a result of a change in the product’s price. Or another way to put it…measures how reactive consumers are to price changes. Demand is elastic when a change in price causes a large change in demand. Ex. Houses Demand is inelastic when a change in price causes a little to no change in demand. Ex. Salt Demand is unit elastic when a change in price causes a proportional change in demand. Ex. Price increase by 20%, demand decrease by 20%.

Demand Elasticity Demand is Elastic when a given change in price causes a relatively larger change in the quantity demanded. The more substitutes that are available, the more price elastic demand is. The term elastic implies responsiveness.

Inelastic Demand Demand Inelasticity means that a given change in price causes a relatively smaller change in the quantity demanded. If there are few, if any, substitutes available the product will be inelastic.

Determinants of Demand Elasticity Demand is elastic if the answer to the following questions are “yes.” Can the purchase be delayed? Some purchases cannot be delayed, regardless of price changes. Are adequate substitutions available? Price changes can cause consumers to substitute one product for a similar product.

Determinants of Demand Elasticity Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumer’s income. For Examples: See Figure 4.6 on page 108