Unit 8: The Free Enterprise System The Law of Demand

I. An Introduction to Demand Price per Frosty Quantity Demanded per day 2 4 1.50 8 1 13 .50 19 .25 25 C. A demand schedule is a table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices. Mr. Dinwiddie’s Demand Schedule for Wendy’s Frosties

I. An Introduction to Demand A. In the US, the forces of supply and demand work together to set prices. B. Demand is the desire, willingness, and ability to buy a good or service. For demand to exist, a consumer must want a good or service, be willing to buy it, and have the resources to buy it.

I. An Introduction to Demand D. A demand schedule can be shown as points on a graph. 1. The graph lists prices on the vertical axis and quantities on the horizontal axis. 2. Each point on the graph shows how many units of the product or service an individual will buy at a particular price. 3. The demand curve is the line that connects these points.

The Mighty Demand Curve

I. An Introduction to Demand E. The demand curve slopes downward. 1. This shows that people are normally willing to buy less of a product at a high price and more at a low price. 2. According to the law of demand, quantity demanded and price move in opposite directions.

II. Individual vs. Market Demand A. Market demand is the total demand of all consumers for a product or service. 1. Market demand can also be shown as a demand schedule and demand curve.

Market Demand Schedule Price (monthly bill) Demand 120 Cell phone service price (monthly bill) Cell phone subscribers (millions) 100 $ 124 3.5 $ 92 7.6 80 $ 73 16.0 $ 58 33.7 $ 46 55.3 60 $ 41 69.2 40 10 20 30 40 50 60 70 Quantity (millions of subscribers)

Market Demand Schedule Price (monthly bill) Notice how the law of demand is reflected by the shape of the demand curve. 120 As the price of a good rises … 100 consumers buy less. 80 60 Demand 40 Quantity (millions of subscribers) 10 20 30 40 50 60 70

Market Demand Schedule Price (monthly bill) The height of the demand curve at any quantity shows the maximum price that consumers are willing to pay for that additional unit. 120 100 For example, when 16 million units are consumed, the value of the last unit is $73. 80 60 Demand 40 Quantity (millions of subscribers) 10 20 30 40 50 60 70

III. Diminishing Marginal Utility A. We buy products for their utility- the pleasure, usefulness, or satisfaction they give us. B. The principle of diminishing marginal utility says that our additional satisfaction tends to go down as we consume more and more units. C. To make a buying decision, we consider whether the satisfaction we expect to gain is worth the money we must give up.

An Increase in Demand D2 D1 If DVDs cost $30 each, the demand curve for DVDs, D1, indicates that Q1 units will be demanded. Price (dollars) If the price of DVDs falls to $10, the quantity demanded of DVDs will increase to Q2 units (where Q2 > Q1). 30 D2 Several factors will change the demand for the good (shift the entire demand curve). 20 As an example, suppose consumer income increases. The demand for DVDs at all prices will increase. 10 Quantity (DVDs per year) After the shift of demand, Q3 units are demanded at $10 instead of Q2 (Q3 > Q2 > Q1). D1 Q1 Q2 Q3

Decrease in Demand Price The Demand Curve shifts inward $30 D1 D3 Q2 Q1 Quantity Demanded (per day)

IV. Change in Demand A. Tastes– favorable change leads to increase in demand; unfavorable change to a decrease B. Income– more leads to increase in demand; less leads to decrease in demand for normal goods 1. Opposite for inferior goods C. Number of buyers– the more buyers lead to an increase in demand; fewer buyers lead to decrease

IV. Change in Demand D. Prices of related goods also affect demand Substitute goods the price of the substitute good and demand for the other good are directly related For example, Coke $ Pepsi Demand Complementary goods when goods are complements, there is an inverse relationship between the price of one and the demand for the other For example, Peanut Butter $ Jam Demand

IV. Change in Demand E. Expectations- consumer views about future prices, product availability, and income can shift demand 1. If individuals think they are likely to have more money in the future, their demand for items will increase at all possible prices. 2. If individuals think they are likely to have less money in the future, their demand for items will fall at all possible prices

IV. Change in Demand F. BITER 1. Buyers 2. Income 3. Tastes 4. Expectations 5. Related Goods

V. Elastic and Inelastic Demand Curves A. Elastic Demand- A change in price leads to a relatively large change in quantity demanded. 1. Demand will be elastic when good substitutes for the good are readily available.

V. Elastic and Inelastic Demand Curves B. Inelastic demand- A change in price leads to only a small change in quantity demanded. 1. Demand will be inelastic when few, if any, good substitutes are available.

Elastic and Inelastic Demand Curves Price Gasoline market When the market price for gasoline rises from $1.25 to $2.00 a gallon, the quantity demanded in the market falls insignificantly from 8 to 7 million units per week. $2.00 $1.25 $1.00 In contrast, when the market price for tacos rises from $1.25 to $2.00, quantity demanded in the market falls significantly from 8 to 4 million units per week. D Quantity (gasoline) 1 2 3 4 5 6 7 8 9 Price Taco market $2.00 Because taco demand is highly sensitive to price changes, taco demand is described as elastic; because the demand for petrol is largely insensitive to price changes, gasoline demand is described as inelastic. $1.25 D $1.00 Quantity (tacos) 1 2 3 4 5 6 7 8 9