Chapter 3- Presentation 1 Demand. Law of Diminishing Marginal Utility Each buyer of a product will...

Chapter 3- Presentation 1

Demand

Law of Diminishing Marginal Utility

• Each buyer of a product will get less utility from each extra unit consumed

• Consumers will only buy more units if the prices become progressively cheaper

• Ex- the 4th Big Mac will give less satisfaction than the 3rd, 2nd, 1st

Demand

• A schedule or curve that shows how much of a product that consumers are willing and able to purchase at a each of a series of possible prices at a specified period of time

Quantity Demanded

• The amount of a good or service that buyer(s) want to purchase at a particular price during some time period

Law of Demand

• Ceteris Paribas, as price falls, the quantity demanded rises, and as the price rises, the quantity demanded falls.

• ***inverse relationship between price and quantity demanded

• Ex- if the price of Nike goes up, and Adidas and Reebok stays the same, less Nikes will be purchased

Individual DemandRemember- Demand goes Down

6

5

4

3

2

1

0 10 20 30 40 50 60 70 80 Quantity Demanded (bushels per week)

Pri

ce (

per

bu

shel

)

P Qd

$5

4

3

2

1

10

20

35

55

80

IndividualDemand

P

Q

D

Individual Demand

6

5

4

3

2

1

0

Quantity Demanded (bushels per week)

Pri

ce (

per

bu

shel

)

P Qd

$5

4

3

2

1

10

20

35

55

80

IndividualDemand

P

Q

D1

2 4 6 8 10 12 14 16 18

Demand Can Increase or Decrease

Decrease in Demand

D2

D3

An Increase in DemandMeans a Movementof the Line

A Movement BetweenAny Two Points on a

Demand Curve is Called a Change in

QuantityDemanded

Explanations for the Law of Demand

• 1. Common sense- the lower the price, the more people will buy (hence clearance sales)

• 2. Diminishing Marginal Utility• 3. Income and Substitution Effects

Income Effect

• A lower price increases the purchasing power of a buyer’s income

• A higher price has the opposite effect

Substitution Effect

• At a lower price, buyers will substitute a good in exchange for the higher priced alternative and vice versa

• Ex- If the price of chicken lowers, the buyer will buy less beef, pork etc.

http://www.reffonomics.com/TRB/chapter4/quantitydemanded.swf

Quantity Demanded v Demand

Market Demand

• Assume all the buyers in a market are willing and able to buy the same amounts of a product at each of the possible prices

• ***adding/multiplying the individual quantities demanded

Changes in Demand

• A new demand curve is drawn

• Shift to the left for a decrease and right for an increase in demand

Determinants of Demand

• Changes In: TRIBE

• T- Tastes

• R- Related Goods’ Price

• I- Income of Buyers

• B- # of Buyers

• E- Expectations of the Future

Normal (Superior) Goods

• As income increases, consumers buy more of a good

• Direct relationship

• Ex- steaks, luxury cars

Inferior Goods

• As income increases, demand for the goods falls

• Inverse relationship

• Ex- Ramen noodles, cheap beer, retread tires

Substitute Goods

• one that can be used in place of another good

• An increase in the price of one good will increase the demand of its substitutes and vice versa

Complementary Goods

• One good that is used together with another good

• If the price of one goes up, the demand for the complement will decline and vice versa

• Ex- Peanut butter and Jelly, tuition and textbooks