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Demand
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Unit 2: Demand, Supply, and Consumer Choice
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What is the Law of Demand?
DEMAND DEFINED What is Demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: You are able to purchase diapers, but if you aren’t willing to buy then there is NO demand) What is the Law of Demand? There is an INVERSE relationship between price and quantity demanded
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What is the Law of Demand?
When the price goes up, quantity demanded goes down. When the price goes down, quantity demanded goes up.
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I am willing to sell several A’s in Economics. How much will you pay?
Example of Demand I am willing to sell several A’s in Economics. How much will you pay? Price Quantity Demanded Demand Schedule
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Why does the Law of Demand occur?
The law of demand is the result of three separate behavior patterns that overlap: The Substitution effect The Income effect The Law of Diminishing Marginal Utility We will define and explain each…
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Why does the Law of Demand occur?
1. The Substitution Effect If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa) 2. The Income Effect If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more. Copyright ACDC Leadership 2015
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Why does the Law of Demand occur?
3. Law of Diminishing Marginal Utility Utility = Satisfaction We buy goods because we get utility from them The law of diminishing marginal utility states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed. Discussion Questions: What does this have to do with the Law of Demand? How does this effect the pricing of businesses? Copyright ACDC Leadership 2015
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Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?
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2010 Question 36 D Copyright ACDC Leadership 2015
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Graphing Demand Copyright ACDC Leadership 2015
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Let’s draw a new demand curve for milk…
The Demand Curve A demand curve is a graphical representation of a demand schedule. The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) Let’s draw a new demand curve for milk… Copyright ACDC Leadership 2015
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GRAPHING DEMAND Draw this large in your notes Demand Schedule
Price of Milk Draw this large in your notes $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Q Quantity of Milk Copyright ACDC Leadership 2015
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GRAPHING DEMAND Demand Schedule Price of Milk $5 10 $4 20 $3 30 $2 50
Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand Q Quantity of Milk 15
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Where do you get the Market Demand?
Billy Jean Other Individuals Market Price Q Demd $5 1 $4 2 $3 3 $2 5 $1 7 Price Q Demd $5 $4 1 $3 2 $2 3 $1 5 Price Q Demd $5 9 $4 17 $3 25 $2 42 $1 68 Price Q Demd $5 10 $4 20 $3 30 $2 50 $1 80 P P P P $3 $3 $3 $3 D D D D Q Q Q Q 3 2 25 30
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Demand Review What are the two key aspects of the definition of demand? What is the Law of Demand? Give an example of the substitution effect Give an example of the income effect Give an example of the law of diminishing marginal utility Explain how the law of diminishing marginal utility causes the law of demand How do you determine the MARKET demand for a particular good? (from reading) Name 10 fast food places Copyright ACDC Leadership 2015
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This is a change in demand, not a change in quantity demanded
Shifts in Demand Ceteris paribus-“all other things held constant.” When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts. A shift means that at the same prices, more people are willing and able to purchase that good. This is a change in demand, not a change in quantity demanded PRICE DOESN’T SHIFT THE CURVE Copyright ACDC Leadership 2015
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Change in Demand What if milk makes you smarter? Demand Schedule
Price of Milk What if milk makes you smarter? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand Q Quantity of Milk 19
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Change in Demand What if milk makes you smarter? Demand Schedule
Price of Milk What if milk makes you smarter? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand Q Quantity of Milk 20
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Change in Demand Demand Schedule Price of Milk $5 30 $4 40 $3 50 $2 70
1 Price Quantity Demanded $5 30 $4 40 $3 50 $2 70 $1 Demand Q Quantity of Milk 21
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Prices didn’t change but people want MORE Milk
Change in Demand Demand Schedule Price of Milk Increase in Demand Prices didn’t change but people want MORE Milk $5 4 3 2 1 Price Quantity Demanded $5 30 $4 40 $3 50 $2 70 $1 D1 Demand Q Quantity of Milk 22
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Change in Demand What if milk makes causes baldness? Demand Schedule
Price of Milk What if milk makes causes baldness? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand Q Quantity of Milk 23
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Change in Demand What if milk makes causes baldness? Demand Schedule
Price of Milk What if milk makes causes baldness? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand Q Quantity of Milk 24
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Change in Demand Demand Schedule Price of Milk $5 $4 5 $3 20 $2 30 $1
Quantity Demanded $5 $4 5 $3 20 $2 30 $1 80 60 Demand Q Quantity of Milk 25
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Prices didn’t change but people want LESS Milk
Change in Demand Demand Schedule Price of Milk $5 4 3 2 1 Decrease in Demand Prices didn’t change but people want LESS Milk Price Quantity Demanded $5 $4 5 $3 20 $2 30 $1 80 60 D2 Demand Q Quantity of Milk 26
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The demand stays the same
Change in Demand Demand Schedule Price of Milk What happens to the demand for milk if the price of milk goes up? $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 NOTHING! The demand stays the same Demand Q Quantity of Milk 27
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Change in Qd vs. Change in Demand
There are two ways to increase quantity from 10 to 20 Price of Milk P A to B is a change in quantity demand (due to a change in price) A to C is a change in demand (shift in the curve) A C $3 $2 B D2 D1 Q Milk Quantity of Milk
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What Causes a Shift in Demand?
5 Shifters (Determinates) of Demand: Tastes and Preferences Number of Consumers Price of Related Goods Income Future Expectations Changes in PRICE don’t shift the curve. It only causes movement along the curve. Copyright ACDC Leadership 2015
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Tastes and Preferences
People’s preferences affect how much of a good they buy. A change in favor of a good moves the curve to the right A change NOT in favor of the good moves the curve to the left. Marketing - Nike vs. LA Gear
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Tastes and Preferences Cont’d
New Information Kale vs. Aspartame Y2K , Vaccinations (Penn & Teller): -Fads = no science to this one (Yoyo’s, fidget spinners, etc..) *Can you think of one?
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Number of Consumers An increase in the number of buyers in a market area results in higher demand. Baby boom after WWII in creased demand for baby diapers. A decrease in the number of buyers in a market area results in lower demand.
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Income Change in consumer income can cause a change in demand.
When income goes up, you can afford to buy more! *For normal goods = direct relationship between income and demand = if income goes up demand goes up or if income goes down demand goes down. *For inferior goods the relationship is opposite *Can you think of an inferior good? Ex. Generic goods (Kroger’s, Kirkland, Safeway Select) *Did anyone see Super Bowl commercials for these brands?
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Income The incomes of consumer change the demand, but how depends on the type of good. Normal Goods Ex: Luxury cars, Sea Food, jewelry, homes As income increases, demand increases As income falls, demand falls 2. Inferior Goods Ex: Top Ramen, used cars, used clothes As income increases, demand falls As income falls, demand increases Spam-Inferior Yachts- Normal Off Brand Cereal-Inferior McDonald’s-Inferior Toilet Paper- Probably no connection to income (The point-some products are very reliant on income and others are not) Copyright ACDC Leadership 2015
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Income Change in consumer income can cause a change in demand.
When income goes up, you can afford to buy more! *For normal goods = direct relationship between income and demand = if income goes up demand goes up or if income goes down demand goes down. *For inferior goods the relationship is opposite *Can you think of an inferior good? Ex. Generic goods (Kroger’s, Kirkland, Safeway Select)
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Future Expectations A newly formed expectation of higher future prices may cause consumers to buy now in order to “beat” the anticipated price rises; thus, increasing current demand. EX: freezing weather destroys much of Florida’s cirrus crop, consumers may reason that he price of orange juice will rise. Y2K (explains irrational behavior so we don’t violate one of our laws = rational self interest) -People expected the world to end so demand for bottled water, batteries and canned food went through the roof
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Prices of Related Goods
The demand curve for one good can be affected by a change in the price of ANOTHER related good. Substitutes are goods used in place of one another. Ex: If price of Pepsi falls, demand for coke will… If the price of one increases, the demand for the other will increase (or vice versa) 2. Complements are two goods that are bought and used together. Ex: If price of hot dogs falls, demand for hot dog buns will... If the price of one increase, the demand for the other will fall. (or vice versa) Copyright ACDC Leadership 2015
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Substitutes or Complements?
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Substitutes 39 39
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Substitutes 40 40
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Substitutes 41 41
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Substitutes 42 42
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Substitutes 43 43
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Substitutes 44 44
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Substitutes 46 46
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Complements 47 47
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Inferior Goods 48 48
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Practice Questions 1. Which of the following will cause the demand for milk to decrease? Increase in the price of a substitute A decrease in income assuming that milk is a normal good A decrease in the price of milk An increase in the price of milk A decrease in the price of a complementary good Answer B Copyright ACDC Leadership 2015
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Practice Questions 2. Which of the following will cause the quantity demanded of milk to decrease? Increase in the price of a substitute A decrease in income assuming that milk is a normal good A decrease in the price of milk An increase in the price of milk A decrease in the price of a complementary good Answer D Copyright ACDC Leadership 2015
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Practice Identify the determinant (shifter) then decide if demand will increase or decrease Shifter Increase or Decrease Left or Right 1 2 3 4 5 6 7 8 Copyright ACDC Leadership 2015
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Hamburgers (a normal good)
Practice Identify the determinant (shifter) then decide if demand will increase or decrease Hamburgers (a normal good) Population boom Incomes fall due to recession Price of tacos, a substitute, decreases Price increases to $5 for hamburgers New health craze- “No ground beef” Hamburger restaurants announce that they will significantly increase prices NEXT month Price of fries, a complement, increases Restaurants lower price of burgers to $.50 Number of consumers, increase. Income, decrease. Price of Related Goods (Substitute), decrease. Price doesn’t shift curve, no change. Tastes and preferences, decrease. Expectations, increase. Price of Related Goods (Complements), decrease. 52 52
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