Demand

Demand I. What is Demand? II. Change in Quantity Demanded III. Change in Demand IV. Diminishing Marginal Utility V. Demand Elasticity

I. What is Demand?

What is Demand? Demand is more than having the desire to own a certain product. Demand is the desire, ability, and willingness to buy a product. Economists, however, want to know how much will be demanded at higher and lower prices. Demand means the full range of possibilities has been considered.

The Demand Schedule Economists want to see the market as a whole. They want to know the amount people will demand at each and every possible price. A demand schedule shows the quantity demanded at all prices that might prevail in the market at a given time.

The Demand Curve Demand can also be shown graphically. The demand curve shows the same information. The points show the quantity demanded at a particular price. The curved line in labeled DD and is always downward sloping.

The Law of Demand What generalizations can you make about demand based on based on the figures from the demand schedule and demand curve? The Law of Demand states that the demand for an economic product varies inversely with its price. High prices mean low quantity demanded while low prices mean high quantity demanded.

II. Change in Quantity Demanded

Change in Quantity Demanded We all see the Law of Demand at work when consumers flock to stores on bargain days and special sales when prices are temporarily reduced. A change in quantity demanded is a change in the quantity of the product purchased in response to a change in price. This represented by a movement along the demand curve.

Change in Quantity Demanded An examination of the income and substitution effects helps explain why this happens. The Income Effect-when prices are lower, consumers have more money, so they buy more. At a price of $15 per CD, consumers spent $555 to buy 37 CDs. If the price drops to $9, they will spend only $333 on the same quantity. The consumers are $222 richer because of the drop in price, and they may spend more on CDs.

Change in Quantity Demanded The Substitution Effect – The change in quantity demanded because of the change in the relative price of the product. CD’s are cheaper than other relative products: concerts, movies, and other forms of entertainment.

III. Change in Demand

Change in Demand A change in demand occurs when people are willing to buy different amounts at the same prices. This is different than the change in quantity demanded, which is movement along the demand curve. When there is a change in demand, the entire curve shifts and people buy more or less at each and every price.

Change in Demand What kind of things do you think cause a change in demand?

Change in Demand Reasons: 1. Consumer Income – As income rises, consumers are able to buy more at each and every price. If income declines, consumers buy less at each and every price. 2. Consumer Tastes – Advertising, news reports, trends and even seasons can affect consumer tastes. If consumers want more of a product, they buy it anyway.

Change in Demand 3. Prices of Related Products - Change in the price of one can affect the demand for the other. A. Substitutes - Products used in place of other products. Example- butter and margarine. B. Complements – Products that the use of one increases the use of the other. Example- film and cameras.

IV. Diminishing Marginal Utility

Diminishing Marginal Utility People try to get the most useful and satisfactory combination of goods and services (aka utility). Marginal Utility – the extra usefulness and satisfaction a person gets from acquiring one or more unit of a product.

Diminishing Marginal Utility How satisfied would you be after drinking one glass of lemonade after a game of tennis or basketball? The satisfaction you get is the marginal utility of that particular glass of lemonade. How about a second glass? Marginal utility again.

Diminishing Marginal Utility Consumers keep buying a product until the unit consumed gives enough satisfaction to justify the price. In the case of the lemonade, the marginal utility of the first glass probably is far greater than the initial amount paid for the drink. In time, the marginal utility of still one more glass of lemonade will be less than its price. (The thought of one more glass may make you ill. When you reach the point that the marginal utility is less than the price, you will stop buying.

Diminishing Marginal Utility The lemonade example illustrates the principle of diminishing marginal utility. Diminishing marginal utility states the more you acquire, the less eager you are for more. You become less willing to spend your limited income to buy more. What are some other situations that illustrate diminishing marginal utility?

V. Elasticity of Demand

Demand Elasticity The Law of Demand shows that people buy more of an economic product at lower prices than at higher ones. It does not tell how much more, however. Likewise, if prices go up, sales will go down. How much will sales go down, however? Demand Elasticity is the extent to which changes in price cause changes in the quantity demanded.

Demand Elasticity The demand for most products is such that consumers do care about changes in price. Demand is elastic when a relatively small change in price causes a relatively large change in quantity demanded. For example, if a T-bone steak costs $5.59 per pound, only a certain number of people will buy it. However, if it is put on sale at $3.39 per pound, consumers may rush to buy this kind of steak.

Demand Elasticity Demand is inelastic when a given change in price causes a relatively small change in quantity demanded. For example, a higher or lower price for table salt will not bring about much in the quantity demanded, even if the price were cut in half. People can only buy so much salt. Also, the portion of the person’s budget spent on salt is so small that even if the price doubled, it would not make much difference.

Specific vs. General Market When considering the elasticity of demand for a product, it is necessary to define the market being studied. If demand for gasoline at a particular gas station raised prices 10% or dropped prices 10%, it would be very elastic. On the other hand, if all gas stations raised prices 10%, people would still buy, making it inelastic.

Total Receipts Test Total receipts, or total revenue, are determined by multiplying the price of a product by the quantity sold. To test for elasticity: Determine total receipts at the original price and then again at a lower price. If at the lower price, the total receipts exceeds the original it is elastic. If it does not exceed the original it is inelastic.

Total Receipts Test

Determining Demand Elasticity We can also estimate the elasticity of demand for a product by asking three questions: 1. Can the Purchase Be Delayed? Insulin? Tobacco? Tomatoes? T-bone? If the purchase can be delayed, the demand for the product tends to be elastic.

Determining Demand Elasticity 2. Are Adequate Substitutes Available? If steaks and butter go up, what can buyers switch to? If a product has many substitutes, the demand for it tends to be elastic?

Determining Demand Elasticity 3. Does the Purchase Use a Large Portion of Income? Table Salt? Car? When the products require a large portion of income, the demand tends to be elastic.

Determining Demand Elasticity