Introduction to Demand

Microeconomics While macroeconomics deals with broad aspects of the economy (the big picture), microeconomics deals with particular aspects of the economy (the small picture). To understand microeconomics, we need to learn about the concepts of demand and supply, and how they interact to determine market price.

Definition Demand: – The desire, ability, and willingness to buy a product.

Three Components of Demand Desire – Do you want to have the product? Ability to pay – Do you have the money needed to pay for the product? Willingness to pay – Are you willing to pay for this product when there might be an alternative use for the money? – Note: You cannot have willingness without both desire and ability.

Demand and Price The demand for a product depends on its price. A change in price causes a new quantity to be demanded. – This is called a CHANGE IN QUANTITY DEMANDED. – It is NOT a change in demand (to be explained later). Therefore the term demand refers to how much is demanded at each and every possible price (usually by a specific consumer market). There are two ways of showing this relation: – The demand schedule – The demand curve Both show the exact same information.

The Demand Schedule Price per CD# of CDs Demanded $2710 $2413 $2118 $1825 $1537 $1258 $994 $6162 $3300

The Demand Schedule, cont. A CHANGE IN QUANTITY DEMANDED is shown by moving from one pair of numbers (price and quantity) in the schedule to another. – For example, when the price falls from $21 to $15, there is an INCREASE IN QUANTITY DEMANDED from 18 to 37.

The Demand Curve

The Demand Curve, cont. A CHANGE IN QUANTITY DEMANDED is shown by moving along the curve to the right or left from one point to another. – For example, when the price rises from $15 to $21, there is a DECREASE IN QUANTITY DEMANDED from 37 to 18 shown by the leftward movement along the curve.

Increase in Quantity Demanded DS1S2 Quantity Price A B Rightward movement along the demand curve

Decrease in Quantity Demanded DS2S1 Quantity Price A B Leftward movement along the demand curve

Reminders for Demand & Supply Graphs Price always goes on the vertical axis (higher prices are higher on the graph). Quantity always goes on the horizontal axis (higher quantities are further to the right). The corner always represents a price of zero and a quantity of zero.