Understanding Demand

What is Demand?

• Market: any place where people come together to buy and sell goods or services

• An economic market has two sides: – The buying side is referred to as

demand

– The selling side is referred to as supply

What is Demand?

• Demand: the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period

• Willingness refers to the buyers want or desire to buy the good

• Ability refers to the buyer having the money to purchase the good

What is Demand?

• Ex: John doesn’t have $450 for a new iPhone. If he did have the money, he would buy it. John has the willingness to buy the phone, but does not have the ability.

• Ex: on your own, write an example of a person that has the ability to buy, but not the willingness

Law of Demand

• Law of Demand: a law stating that as the price of a good increases, the quantity demanded of the good decreases, and that as the price of a good decreases, the quantity demanded of the good increases.

• If P then Qd

• If P then Qd

Law of Demand

Example:

• If the price for ringtones decreases, demand will ___________.

• If the price for ringtones increases, demand will ___________.

Law of Demand

• Quantity Demanded: the number of units of a good purchases at a specific price.

• Ex: Angie buys two scoops of ice cream for $3 her school lunch. The two scoops of ice cream is the quantity demanded at $3.

Demand Schedule

• The numerical representation of the law of demand

Price Quantity Demanded

5 10

4 17

3 36

2 38

1 53

Demand Curve

• The graphical representation of the law of demand

The Law of Diminishing Marginal Utility

• A law stating that as a person consumes additional units of a good, eventually the utility gained from each additional utility of the good decreases.

• This is why demand is a curve more than a straight line

The Law of Diminishing Marginal Utility

• Ex: You enjoy your first Chipotle burrito more than your second, and you enjoy the second more than the third.

• What are some other examples?

Demand Curve Shift

• As demand increases, the curve shifts right

• As demand decreases, the curve shifts left

What Causes the Demand Curve to Shift?

1) Income

2) Preferences

3) Prices of Related Goods

4) Number of Buyers

5) Future Price

What Causes the Demand Curve to Shift?

• Income: – as income goes up or down, people may

buy more of less of a product.

– Income going up or down, does not mean demand will change. It depends on the kind of good.

– Ex: Food vs. a New Car; House vs. a Vacation

What Causes the Demand Curve to Shift?

• Type of good– Normal good: a good for which the

demand rises as income rises and demand falls as income falls

– Inferior good: a good for which the demand falls as income rises and rises as income falls

– Neutral good: A good for which the demand remains unchanged as income rises or falls

What Causes the Demand Curve to Shift?

• Preferences/tastes: – What people like or don’t like

– a change in favor of a good (people like it) moves the curve to the right

– a change NOT in favor of the good moves the curve to the left

What Causes the Demand Curve to Shift?

• Prices of Related Goods:–Substitute: a similar good. The price of

one good and the demand for the other move in the same direction

–Compliment: a good that is consumed jointly with another good. The price of one and the demand for the other move in opposite directions.

Compliments and Substitutes

What Causes the Demand Curve to Shift?

• Number of Buyers: – An increase in the number of buyers in a

market area results in higher demand

– A decrease results in lower demand

What Causes the Demand Curve to Shift?

• Future Price/Buyer expectations:– If buyers think the price of a good will

increase or decrease in the future, those expectations will impact demand

Will these cost more or less in the future?

Elasticity of Demand

• The relationship between the percentage change in quantity demand and the percentage change in price.

Elasticity of Demand

• Elastic Demand:– The type of demand that exists when

the percentage change in quantity demanded is greater than the percentage change in price.

• Ex: If price rises by 10%, quantity demanded falls by, say, 15%.

Elasticity of Demand

• Inelastic Demand:– The type of demand that exists when

the percentage of change in quantity demanded is less than the percentage of change in price.

– Ex: if price rises by 10%, quantity demanded falls, say, 5%.

Elasticity of Demand

• Unit-Elastic Demand:– The type of demand that exists when

the percentage change in quantity demanded is the same as the percentage change in price.

– Ex. If price rises by 10%, quantity demanded falls by 10%.

What Determines Elasticity of Demand?

• Number of Substitutes:

• Luxuries vs. Necessities:

What Determines Elasticity of Demand?

• Percentage of Income Spent of the Good:

• Time: