The Basics of Demand

Economists study markets. – A market is any place where people come together to buy and sell goods or services. “Demand” - the willingness AND ability of consumers to buy a good or service at a specific period of time – Willingness: ready to buy a good or service – Ability: having the means to buy the good or service

The Law of Demand Consumers buy more of a good when its price decreases and less when its price increases. Price = Quantity demanded

Substitution Effect Take a cab vs. bus (books vs. magazines). These are interchangeable. Substitute option will increase. Ex: when gas prices increase, you will decide to take the bus. When gas prices drop, you will drive your vehicle instead and ride the bus less. Good AGood B P  QD  QD  P  QD  QD 

Diminishing Marginal Utility Ex: you are so hungry that you eat 10 hamburgers. You will really enjoy that first bite but each additional bite will give you LESS satisfaction.

Question How many bottles of an energy drink would you buy from the school’s bending machine in a week given the current price of $2.00?

Discussion What did you notice? Is there a pattern? If so, describe it. What does the data tell us? Why do you think this is so? For those of you who would not purchase any, why? What does this tell us about other influences on economic decision making?

How We Look at Demand -- The Demand Schedule and Curve A schedule is a table that lists the quantity of a good that a person will purchase at each price. This is the STORY. The vertical axis ALWAYS shows price The horizontal axis ALWAYS shows quantity demanded Plot the points on the schedule Connect the dots!! The Demand curve slopes Down. Now you have created a PICTURE OF THE STORY. D Q P

What is the difference between demand and quantity demanded? Demand is a schedule (the story) or curve (the picture) that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time – Example: Michael has a demand for ice cream. This means he has the willingness AND ability to buy ice cream. Quantity demanded refers to how many units will be demanded at a particular price. – Example: Suppose the price of ice cream is $3 per cone and Michael buys two. Therefore two ice cream cones is the quantity demanded at $3.

Movement Along a Demand Curve Versus a Shift of the Curve Remember there is a difference between quantity demanded and demand. Markets never stand still, there are always outside factors that change the actual price of the good or how much is demanded altogether. A change in price creates a change in the quantity demanded, other things constant. – This causes a movement along the demand curve. A change in one of the determinants of demand causes a change in demand. – This causes a shift of a demand curve.

Change in Quantity Demanded Quantity Price

Practice Problem #1 What would happen to the demand of bottles of an energy drink if the prices doubled? Increase or decrease in quantity demanded (Qd)?

Answer to Practice Problem #1 What would happen to the demand for energy drinks if the price doubled? Decrease in quantity demanded

How would it look on the graph? Quantity (Q) Price (P)

How would it look on the graph? Quantity (Q) Price (P)

Practice Problem #2 What would happen to the demand of bottles of an energy drink if they went on sale so that price per bottle decreased? Increase or decrease in quantity demanded (Qd)?

Practice Problem #2 What would happen to the demand of bottles of an energy drink if they went on sale so that price per bottle decreased? Increase in quantity demanded (Qd)

How would it look on the graph? Quantity Price

How would it look on the graph? Quantity (Q) Price (P) $1.00 $ D A B

Why do changes (Δ) in price cause movement along the demand curve? Quantity (Q) Price (P) Demand (D)