The Demand Curve

The Economics of Demand The Demand Curve Changes in Demand

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Demand Demand indicates how much of a product consumers are both willing and able to buy at each possible price during a given period, other things remaining constant.Demand indicates how much of a product consumers are both willing and able to buy at each possible price during a given period, other things remaining constant.

Law of Demand The law of demand says that quantity demanded varies inversely with price, other things constant. Thus, the higher the price, the smaller the quantity demanded.The law of demand says that quantity demanded varies inversely with price, other things constant. Thus, the higher the price, the smaller the quantity demanded.

THINGS THAT EFFECT DEMAND Substitution effectSubstitution effect –The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods Income effectIncome effect –The change in quantity demanded resulting from a change in the consumer’s purchasing power (or real income) Real income – measure in terms of how many goods and services you can buyReal income – measure in terms of how many goods and services you can buy

Example Say that you divide your $10 daily income between apple fritters at today’s prices of $1 each and chocolate bagels at $2 each.Say that you divide your $10 daily income between apple fritters at today’s prices of $1 each and chocolate bagels at $2 each. –CHART

Money Price Relative Price Share of Income Today Tomorrow Today TomorrowToday Tomorrow FRITTERBAGELFRITTERBAGEL $1 $2 ½ Bagel 1 Bagel 1/10 1/5 $2 $2 2 Fritters 1 Fritter 1/5 1/5

Demand Schedule and Demand Curve Demand versus quantity demandedDemand versus quantity demanded –Qualitative vs Quantitative Individual demandIndividual demand –Per Individual (What is your demand for a product?) Market demandMarket demand –All Individual Demands added up

Demand Schedule Price Quantity Demanded per Pizza per Week (millions) a$158 b1214 c920 d626 e332

Millions of pizzas per week (Q d ) $ Price per pizza (P) Demand Curve for Pizza a b c d e D Q P REMEMBER TO MIND YOUR P’s and Q’s

$ (c) Chris $ (b) Brianna $ Price 123 Pizzas (per week) (a) Hector Individual Demand for Pizzas d H d B d C Q P Q P Q P

$ Price 123 Pizzas (per week) (d) Market demand for pizzas 6 Market Demand for Pizzas d H d B d C D ++= Q P

Ceteris Paribus Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.”Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.” –A demand curve is accurate only as long as the ceteris paribus assumption is true. –When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.

Demand Curve How do you think you would show (using the Demand Curve) an increase in the Demand for a good? P D Q 0

The Demand Curve Movement along the Demand Curve means that the Price has changed… Q P D 0 NOT THAT DEMAND HAS INCREASED OR DECREASED!!!!! …HOWEVER WHAT HAS CHANGED FROM POINT “A” TO “B”? QUANTITY DEMANDED! A B Q d Q d P 2 P 1

The Demand Curve P D2D2 Q D1D1 If it shifts to the Right what has happened? Demand has Increased 0

The Demand Curve P D1D1 Q D2D2D2D2 0 What does a shift to the left mean? Demand has Decreased… “LEFT IS LESS”

Shifts in Demand BUT…what are some things that would cause the demand curve to shift?BUT…what are some things that would cause the demand curve to shift? –Income Level –Consumer Expectations –Number of Buyers –Consumer Tastes –Prices of Related Goods

Determinants of Demand 1. Income1. Income –Changes in consumers incomes affect demand. A normal good is a good that consumers demand more of when their incomes increase.A normal good is a good that consumers demand more of when their incomes increase. An inferior good is a good that consumers demand less of when their income increases.An inferior good is a good that consumers demand less of when their income increases.

Determinants of Demand 2. Consumer Expectations2. Consumer Expectations –Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good today. Example: Anticipation of SalesExample: Anticipation of Sales

Determinants of Demand 3. Number of Buyers3. Number of Buyers –Changes in the size of the population also affects the demand for most products. Example: Demand for houses would decrease if the population decreasedExample: Demand for houses would decrease if the population decreased

Determinants of Demand 4. Consumer Tastes4. Consumer Tastes –Tastes are highly individualized Advertising plays an important role in many trends and therefore influences demand.Advertising plays an important role in many trends and therefore influences demand.

Determinants of Demand 5. Prices of Related Goods5. Prices of Related Goods –Substitutes: are goods used in place of one another. Example: skis and snowboardsExample: skis and snowboards –Complements: are two goods that are bought and used together. Example: skis and ski bootsExample: skis and ski boots

Closure Examples:Examples: D P Q 0 D P Q 0