3 Demand

Economic Principles:Demand

Who’s Da Man? (Me.)

Who Wants This Watch?

• Owned by me for 5 years.• Broken.

$1,000.00

Who Wants This Watch?

• Owned by Brad Pitt for 5 years.• Broken.

$1,000.00

What is Demand?

• In your own words, 1 minute, in yournotes.

• The quantities of a particular good orservice consumers are willing andable to buy at different possibleprices at a particular time.

30 seconds left

Demand vs. “Want”

I want this -->

However, demand refers to being willing and able.

Let’s Talk AboutHamburgers

At higher prices,people buy less ofsomething than theydo at lower prices.

Why?

Price Effect

4 factors that explain priceeffect

Buying Power

•If prices go down, you canbuy more hamburgers withthe same amount ofmoney.

•Opposite, if price goes up.

Diminishing PersonalValue

• If prices go down, you might eathamburgers all the time instead ofonce a week.

• For example, normally burgers are$5.00 so you only have it once aweek, but if the price falls to $1.00you will eat burgers for luncheveryday.

Diminishing MarginalUtility

• How good does the first bite of thatfirst burger taste?

• How good does the last bite of yourfifth burger taste?

• The only way you’re going to eat fiveburgers is if the price is lower.

Substitutes

• What might you have for lunch if burgersare too expensive?

• Availability of substitutes keeps pricesfrom getting too high.

• What is a substitute for…?

Price Effect vs. Change inDemand

• For demand to change, the entiredemand curve must move.

• What causes demand to increase ordecrease?

Price Elasticity ofDemand

• Measurement of the price effect.

• If the price changes, how much doesthe quantity demanded change?

• Inelastic <-------------------->Elastic

• Two curves, one with a steeper slopethan the other.

• Same change in price, which onenow has a higher quantitydemanded?

• So, which one is more elastic?

$2.00

$1.00

500 600 700

A

B

Elastic

• Lots of substitutesavailable

• Larger part of aperson’s budget

• People have a longtime to adjust to aprice change

• Examples?

• Few substitutes• Small part of

budget• Little or no time to

adjust to pricechanges

• Examples?

Inelastic

Change in Income

• If incomes rise, people have moremoney to spend.

• Either buy greater quantities at thesame price or willing to pay higherprices.

Prices or Availability ofSubstitutes

• If the price of one item changes ashift in demand for a substituteoccurs.

• Example?

Prices or Availability ofComplementary Goods

• Goods that are used together• Examples?

• How might the change in price of onecomplementary good affect another?

• Price of one goes up, the demand forthe other goes down.

Change in Weather orSeason

• Demand for some items changesbased on the temperature or theweather.

• Like what?

Change In the Number ofBuyers

• If the population of an areaincreases, then there is moredemand.

Change in Styles, Tastes,Habits

• What is the current demand forparachute pants?

Change in Expectations

• What if there was a rumor that yourfavorite fast food restaurant mightshut down? How would that affectyour demand?

Practice

• The price of maple syrup goes updue to a terrible maple tree virus.What might happen to the demandfor pancake mix?

• The demand for pancake mix will godown.

Complementary goods

• I invent a new type of orange juicemachine that can convert 100% of anorange into the most delicious orangejuice anyone has ever tasted for muchcheaper than traditional production.Therefore, the price of orange juice goesdown. What happens to the demand forapple juice?

• Demand for apple juice goes down.

Substitutes

• Britney Spears, who everyone thinksis totally sweet, decides to startwearing raccoon fur hats all the time.How might this affect the demand forraccoon fur hats?

• The demand will go up.

Change in styles, tastes, habits.

• A new law is written that says allcomputers sold after January 31st,2009 must be made by Apple. Whatmight happen to the demand for PC’sprior to that date?

• The demand for PC’s will go up

Change in expectations

• A new multi-national company moves it’sheadquarters into Bowling Green, OH.The company is bringing 10,000 peoplefrom out of town to live in BG. How mightthis affect the demand for pizza in BG?

• Due to more people in the market, thedemand will go up

Change in number of buyers

• Microsoft decides to drop the price ofthe Xbox 360 to $100. How doesthis affect the demand? Thinkcarefully about price affect vs.change in demand!

• There is no change in demand.However, there is a change in thequantity demanded.