DemandDemand

What is DemandWhat is Demand

Demand- the desire, ability and willingness Demand- the desire, ability and willingness to buy a productto buy a product

Illustrating DemandIllustrating Demand

Quantity is always the horizontal axis, and is expressed as the letter Q

Price is always the vertical axis, and is expressed as the letter P

The Demand Schedule- The Demand Schedule- A listing A listing that shows the quantities demanded of a that shows the quantities demanded of a

productproduct PricePrice $30$30 2525 2020 1515 1010 55

Quantity DemandedQuantity Demanded 00 00 11 33 55 88

Graphing A Demand CurveGraphing A Demand Curve

Q 0 1 3 5 8

P

$30

25

20

15

10

5

A

B

C

A Change in Quantity A Change in Quantity DemandedDemanded

P

Q 1 5 10

10

5

1

A movement along the demand curveA movement along the demand curveshows a change in the quantity shows a change in the quantity

demandeddemanded

LAW OF DEMANDLAW OF DEMAND

AS THE PRICE OF AN ITEM RISES AND AS THE PRICE OF AN ITEM RISES AND OTHER FACTORS REMAIN OTHER FACTORS REMAIN UNCHANGED, THE QUANTITY UNCHANGED, THE QUANTITY DEMANDED BY BUYERS WILL FALLDEMANDED BY BUYERS WILL FALL

AS THE PRICE OF AN ITEM FALLS THE AS THE PRICE OF AN ITEM FALLS THE QUANTITY DEMANDED WILL QUANTITY DEMANDED WILL INCREASEINCREASE

Individual and Market Demand Individual and Market Demand CurvesCurves

A Market Demand Curve- The demand curve A Market Demand Curve- The demand curve that shows the quantities demanded by that shows the quantities demanded by everyone who is interested in purchasing a everyone who is interested in purchasing a product.product.

An Individual Demand curve- The demand curve An Individual Demand curve- The demand curve that shows the quantity demanded from a that shows the quantity demanded from a specific person.specific person.

ID1 + ID2+ ID3 = MDID1 + ID2+ ID3 = MD

WHAT AFFECTS DEMAND?WHAT AFFECTS DEMAND?

THE PRINCIPLE OF DIMINISHING THE PRINCIPLE OF DIMINISHING MARGINAL UTILITYMARGINAL UTILITY

THE INCOME EFFECTTHE INCOME EFFECTSUBSTITUTION EFFECTSUBSTITUTION EFFECTATTITUDES AND PREFERENCESATTITUDES AND PREFERENCES

Marginal UtilityMarginal Utility

The extra usefulness or satisfaction a The extra usefulness or satisfaction a person gets from acquiring or using one person gets from acquiring or using one more unit of a productmore unit of a product

PRINCIPLE OF DIMINISHING PRINCIPLE OF DIMINISHING MARGINAL UTILITYMARGINAL UTILITY

AS AN INDIVIDUAL OBTAINS MORE AS AN INDIVIDUAL OBTAINS MORE AND MORE UNITS OF AN ITEM DURING AND MORE UNITS OF AN ITEM DURING A SPECIFIED TIME PERIOD, HE OR A SPECIFIED TIME PERIOD, HE OR SHE WILL OBTAIN LESS AND LESS SHE WILL OBTAIN LESS AND LESS UTILITY (SATISFACTION) FROM EACH UTILITY (SATISFACTION) FROM EACH ADDITIONAL UNIT.ADDITIONAL UNIT.

INCOME EFFECTINCOME EFFECT

THE ABILITY TO PURCHASE MORE OR THE ABILITY TO PURCHASE MORE OR LESS OF AN ITEM WITH A GIVEN LESS OF AN ITEM WITH A GIVEN AMOUNT OF MONEY BECAUSE OF A AMOUNT OF MONEY BECAUSE OF A CHANGE IN PRICECHANGE IN PRICE

PEOPLE’S INCOME EFFECTS THEIR PEOPLE’S INCOME EFFECTS THEIR ABILITY TO BUY GOODS AND ABILITY TO BUY GOODS AND SERVICESSERVICES

SUBSTITUTION EFFECTSUBSTITUTION EFFECT

THE TENDENCY FOR CONSUMERS TO THE TENDENCY FOR CONSUMERS TO SUBSTITUTE HIGHER PRICED ITEMS SUBSTITUTE HIGHER PRICED ITEMS FOR LESS EXPENSIVE ITEMSFOR LESS EXPENSIVE ITEMS

WHEN YOU BUY PRODUCTS AT THE WHEN YOU BUY PRODUCTS AT THE STORE DO YOU COMPARE PRICES STORE DO YOU COMPARE PRICES FOR SIMILAR PRODUCTS?FOR SIMILAR PRODUCTS?

Change in DemandChange in Demand

A Change in demand is a shift in demand A Change in demand is a shift in demand curve when people are now willing to buy curve when people are now willing to buy different amounts of a product at the same different amounts of a product at the same prices. prices.

A shift to the right shows an increase in A shift to the right shows an increase in demand.demand.

A shift to the left shows a decrease in A shift to the left shows a decrease in demand. demand.

P

40

30

20

10

0

Q 1 3 5 7 9 11 13 15 17

Line 1

Line 2A 1

A 2

Shift in Demand

Factors that can Change Factors that can Change DemandDemand

Consumer IncomeConsumer IncomeConsumer TastesConsumer TastesSubstitutes- products that can be used in Substitutes- products that can be used in

place of anotherplace of anotherComplements- the use of one item Complements- the use of one item

increases the utility of anotherincreases the utility of anotherChange in ExpectationsChange in ExpectationsNumber of ConsumersNumber of Consumers

Elasticity of DemandElasticity of Demand

Elasticity- a measure of the Elasticity- a measure of the responsiveness that tells us how a responsiveness that tells us how a dependent variable such as quantity dependent variable such as quantity responds to an independent variable such responds to an independent variable such as priceas price

In other words. . . .the amount of change In other words. . . .the amount of change in the quantity demanded based on factors in the quantity demanded based on factors such as price. such as price.

Elastic DemandElastic Demand

A change in price causes a larger CQDA change in price causes a larger CQD

P 10 9 8 7 6 5 4 3 1

1 2 3 4 5 6 7 8 9 10 Q

Change in Price 8 to 7Change in Qd 4 to 8% of Change QD > %Change P

Inelastic DemandInelastic Demand

P 10 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8 9 10Q

Change in Price 8 to 7Change in QD 2 to 4The smaller the % of CQD compared to the % of Change in Price, is the level of inelasticity of a product

Inelastic- a given change in price causes a relatively smaller change in QD

Unit or Unitary Elastic DemandUnit or Unitary Elastic Demand

P 10 9 8 7 6 5 4 3 2 1

1 2 3 4 5 6 7 8 9 10Q

Change in Price 8 to 7Change in QD 2 to 3

A Given change in price causes a proportional Change in Quantity Demanded1 to 1 change

Factors Determining Elasticity Factors Determining Elasticity

Can the Purchase be Delayed?Can the Purchase be Delayed?Are Adequate Substitutes Available?Are Adequate Substitutes Available?Does the Purchase Use a Large Portion of Does the Purchase Use a Large Portion of

Income?Income?

Determine ElasticityDetermine Elasticity

Individual ChoicesIndividual ChoicesGasolineGasolineStaple items like MilkStaple items like MilkWorld Series ticketsWorld Series ticketsThe New Korn CDThe New Korn CD

Business ChoicesBusiness ChoicesChicken for KFCChicken for KFCChicken for a Mexican RestaurantChicken for a Mexican RestaurantSteel to Produce New AutomobilesSteel to Produce New AutomobilesA New Company Car A New Company Car Class Sets of Books for a ClassroomClass Sets of Books for a Classroom Individual Books for each studentIndividual Books for each student

SupplySupply

LAW OF SUPPLYLAW OF SUPPLY

AS THE PRICE OF AN ITEM RISES AND AS THE PRICE OF AN ITEM RISES AND OTHER FACTORS REMAIN OTHER FACTORS REMAIN UNCHANGED, THE QUANTITY UNCHANGED, THE QUANTITY SUPPLIED BY SUPPLIERS WILL RISE.SUPPLIED BY SUPPLIERS WILL RISE.

AS THE PRICE OF AN ITEM FALLS THE AS THE PRICE OF AN ITEM FALLS THE QUANTITY SUPPLIED BY SUPPLIERS QUANTITY SUPPLIED BY SUPPLIERS WILL FALL.WILL FALL.

Supply ScheduleSupply Schedule

Similar to a Demand Schedule, except that Similar to a Demand Schedule, except that a Supply Schedule is a listing of the a Supply Schedule is a listing of the various quantities of a particular product various quantities of a particular product supplied at all possible prices. supplied at all possible prices.

Graphing Supply CurveGraphing Supply Curve

1 3 5 7 9 11 13 15 17 19 21 23Q

P 8 7 6 5 4 3 2 1

Change in Quantity SuppliedChange in Quantity Supplied

P

Q

EQUILIBRIUM PRICEEQUILIBRIUM PRICE

THE PRICE AT WHICH THE QUANTITY THE PRICE AT WHICH THE QUANTITY DEMANDED IS EXACTLY EQUAL TO DEMANDED IS EXACTLY EQUAL TO THE QUANTITY SUPPLIED.THE QUANTITY SUPPLIED.

P

Q

D

S

Equilibrium Price

SURPLUSSURPLUS

A SITUATION THAT RESULTS WHEN A SITUATION THAT RESULTS WHEN THE QUANTITY SUPPLIED EXCEEDS THE QUANTITY SUPPLIED EXCEEDS THE QUANTITY DEMANDED.THE QUANTITY DEMANDED.

WHAT DO STORES DO IF THEY WHAT DO STORES DO IF THEY CANNOT SELL THEIR GOODS ON THE CANNOT SELL THEIR GOODS ON THE SHELF?SHELF?

P

Q

D

S

Equilibrium PriceSurplus

SHORTAGESHORTAGE

A SITUATION THAT RESULTS WHEN A SITUATION THAT RESULTS WHEN THE QUANTITY DEMANDED EXCEEDS THE QUANTITY DEMANDED EXCEEDS THE QUANTITY SUPPLIED?THE QUANTITY SUPPLIED?

IF A BUSINESS SELLS OUT OF A IF A BUSINESS SELLS OUT OF A PARTICULAR ITEM, WHAT DOES IT PARTICULAR ITEM, WHAT DOES IT DO?DO?

P

Q

D

S

Equilibrium PriceSurplus

Shortage

Change in SupplyChange in Supply

Factors that can change SupplyFactors that can change SupplyCost of InputsCost of InputsProductivityProductivityTechnologyTechnologyTaxes and SubsidiesTaxes and SubsidiesChanges in ExpectationsChanges in ExpectationsGovernment RegulationsGovernment RegulationsNumber of SellersNumber of Sellers

Model ExampleModel Example

P

Q

D

S

0

2

4

6

8

10 20 30 40 50

Increase in SupplyIncrease in Supply= Shift to the Right= Shift to the Right

P

Q

D

S1

S2

0

2

4

6

8

10 20 30 40 50

Decrease in SupplyDecrease in Supply= Shift to the Left= Shift to the Left

P

Q

D

S1

S2

0

2

4

6

8

10 20 30 40 50

Theory of ProductionTheory of Production

Stages of ProductionStages of Production

Stage One Production- First workers Stage One Production- First workers cannot work efficiently, too many cannot work efficiently, too many resources for each worker. Stage of resources for each worker. Stage of Increasing ReturnsIncreasing Returns

Stage Two Production- Total production Stage Two Production- Total production keeps growing, but by smaller incrementskeeps growing, but by smaller increments

Stage Three Production- Output increases Stage Three Production- Output increases at a diminished rate, as more workers are at a diminished rate, as more workers are added. “Law of Diminishing Returns” added. “Law of Diminishing Returns”