DEMAND “How Markets Work”

What is Demand? Ferrari F-430 Retail: $ 350,000 Lamborghini Gallardo Retail: $310,000 Rolex Crown Collection Retail: $ 64, 500 Chloe Platinum 2ct Eternity Ring $ 5, ISA Ancona Yacht List: $14,500,000

Does WANT = DEMAND? Three Criteria have to be met: 1.Desire 2.Ability 3.Willingness Demand = the desire, ability, and willingness to purchase goods and services (G/S). The AMOUNT consumers will various PRICES!

Ceteris paribus, as prices rise, the QUANTITY DEMANDED falls. Vice versa Ceteris paribus, as prices fall, the QUANTITY DEMANDED increases. The LAW of DEMAND

Three Reasons for the Law of Demand We call these the: Income Effect Substitution Effect Diminishing Marginal Utility

INCOME EFFECT As prices go down, consumers “real’ income goes up! They can buy more with each dollar. As prices go up, consumers “real” income goes down! They can buy less with each dollar. P P I I

SUBSTITUTION EFFECT As the price for a good or service increases, consumers will substitute another good or service that is cheaper.

DIMINISHING MARGINAL UTILITY As we buy more and more of a good our level of satisfaction (utility) diminishes. We will not continue to buy more unless the seller lowers the price. BOGO HALF OFF

Demand Schedule A TABLE showing the amount that will be purchased at various prices. Price Quantity $ $ $3.00 2

Demand Curve $ Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 A GRAPH that shows the AMOUNT that will be purchased at VARIOUS PRICES.

Price Elasticity of Demand uDemand elasticity: A measure of how much the quantity demanded of a good responds to a change in the price of that good. uDemand is elastic if the quantity consumers buy changes substantially when the price of the good changes uDemand is inelastic if the quantity demanded changes proportionately less than the change in price.

Determinants of Price Elasticity of Demand uIf the good is a luxury. uThe longer the time period. uThe larger the number of close substitutes. uThe more narrowly defined the market Demand tends to be more inelastic: uIf the good is a necessity uThe shorter the time period. uThe smaller the number of close substitutes. uThe more largely defined the market. Demand tends to be more elastic :

Elastic Demand Quantity Price 4 $5 1. A 22% increase in price... Demand leads to a 67% decrease in quantity. An elastic demand curve is fairly flat – showing small changes in prices cause large changes in quantity demanded

Inelastic Demand Quantity Price 4 $5 1. A 22% increase in price... Demand leads to a 11% decrease in quantity. An inelastic demand curve is fairly steep – showing changes in prices lead to smaller changes in quantity demanded

Changes in QUANTITY Demanded… A change in QUANTITY DEMANDED means consumers are BUYING MORE OR LESS because of a CHANGE IN PRICES. A change in QUANTITY DEMANDED is demonstrated by MOVEMENT ALONG a demand curve caused by a CHANGE IN PRICE D1D1 Price (P) Quantity Demanded (QD) A B Q1Q1 Q2Q2 P1P1 P2P2  QD 0 0

What causes a change in quantity demanded? A change in price.

The LAW of DEMAND CETERIS PARIBUS, as prices rise, the quantity demanded falls and vice versa along a constant demand curve. CETERIS PARIBUS means “While one thing changes (price ), everything else remains the same.”

Will you never be willing or able to buy this car?

IS DEMAND…

Changes in DEMAND A Change in Demand means: –Consumers purchase more or less products at EVERY PRICE LEVEL causing a change in the demand schedule and a shift of the curve. D1D1 Price (P) Quantity Demanded (QD) D2D2 D3D3 0 0 DD P 1 P 2

Changes in DEMAND Demand changes when something other than price changes the market conditions. Non-price Determinants of Demand –Income of Consumers –Number of Buyers (population changes) –Expectations of Prices or Income in the Future –Prices of Related Goods (Substitute goods or Complementary goods) –Tastes & Preferences of Consumers