Demand Notes

• Quantity Demanded- the quantity of a good or service consumers are willing and able to purchase at a specific price at a given point in time.

• Demand- is the relationship between the quantities of a good or service consumers are willing and able to purchase and the various prices the products are offered for sale at a given point in time.

• True or False– Demand is the entire relationship

between all of the quantities demanded of a product and the various possible prices they are offered for sale at a given time.

– The quantity demanded of a product is only part of the demand relationship. It represents a specific quantity at a particular price, not the entire relationship

Demand Schedule

• A demand schedule shows the relationship between the quantities of a good consumers are willing and able to purchase and the various prices for which it is offered for sale in a tabular format

Demand Curve

• A demand curve is a graphic representation of the relationship between the quantities of a good or service consumers are willing and able to purchase and the prices the products are offered for sale.

Assumptions of a Demand Curve

• All characteristics of Capitalism/ competitive markets

• Specific time period

• Ceteris paribus (all other things remain the same)

Demand Schedule

Price (P) Quantity (Q)

$1 5

$2 4

$3 3

$4 2

$5 1

Lets Graph the demand schedule

Price

$1

$2

$3

$4

$5

1 4 532Quantity

Price

$1

$2

$3

$4

$5

1 4 532Quantity

Demand Curve

• The demand curve is downward sloping from left to right.

• The demand curve has this shape because it reflects a(n) ____________ relationship between prices and quantities demanded

Relationships

• The demand curve is downward sloping from left to right.

• The demand curve has this shape because it reflects an inverse relationship between prices and quantities demanded

Relationships• When two related variables move in the

same direction, the express a direct relationship

As price goes up, quantity goes up!

Price

$1

$2

$3

$4

$5

1 4 532Quantity

Relationships• When two related variables move in

opposite directions, they express an inverse relationship

Price

$1

$2

$3

$4

$5

1 4 532Quantity

As price goes down, quantity goes up!

Price

$1

$2

$3

$4

$5

1 4 532Quantity

_______ P _______ QD

Price

$1

$2

$3

$4

$5

1 4 532Quantity

_______ P _______ QD

• In the graphs above, illustrates the effect of the change in price on the change in quantity demanded.

• The inverse relationship between the price of a product and the quantity demanded is called the law of demand.

Reasons for inverse relationship

• Income effect:– An increase in the price of a product reduces

the purchasing power of a consumer’s income; therefore, the consumer buys less of the product

– A decrease in the price of a product increases the purchasing power of a consumer’s income; therefore the consumer buys more of the product

Reasons for inverse relationship

• Substitution Effect– Rational consumers have a tendency to

substitute relatively low priced products for relatively high priced products; therefore, an increase in the price of a product will cause consumers to buy less of the product for which they can substitute lower-priced products.

Reasons for inverse relationship

• Diminishing marginal utility– Each additional unit of a product that is

purchased provides less and less satisfying power to the consumer; therefore, to encourage consumers to purchase quantities of a product, the price must be decreased.

• A change in the price of a good or service causes a change in quantity demanded. This can be illustrated by a movement along the demand curve up and down

Price

$1

$2

$3

$4

$5

1 4 532 Quantity

We move from one point (i.e. from $4 to$2) to another

• Therefore, a change in demand (total relationship) is caused by a change in some other factor than price of the good itself. The NON-PRICE factor or determinant of demand changes all the quantities at the various prices, thus changing the entire demand relationship

• A change in demand is illustrated by a shift in the demand curve to the left for a decrease and to the right for an increase in demand

Price

$1

$2

$3

$4

$5

1 4 532Quantity

Price

$1

$2

$3

$4

$5

1 4 532Quantity

Price

$1

$2

$3

$4

$5

1 4 532Quantity

Price

$1

$2

$3

$4

$5

1 4 532Quantity

Price

$1

$2

$3

$4

$5

1 4 532Quantity

NONPRICE DETERMINANTS OF DEMAND

1. Changes in tastes and preferences

2. Changes in people’s incomeNormal goods- As income goes up, so does demand

Inferior goods- As income goes up, demand goes downNeutral goods- no effect

3. Change in the prices of related goodsSubstitute goods- Is a direct relationship, As price of the normal good goes

up, demand for the substitute goes up

Complementary goods- Is an inverse relationship. As price of

normal good goes up (like peanut butter), the demand for complementary good (like jelly) goes down

NON PRICE DETERMINANTS OF DEMANDcont’d

4. Changes in the number of buyers (market size)

5. Changes in consumer expectations– If you expect gas prices to go down tomorrow, what will happen to

demand for gas today?

– If you expect gas prices to go up tomorrow, what will happen to demand for gas today?