DEMAND

LAW OF DEMAND:As the price of a product

increases, quantity demanded falls; likewise, as the price of a product decreases, quantity

demanded increases.

P= QD P= QD

REASONS THAT EXPLAIN THE LAW OF DEMAND:

1. Diminishing Marginal Utility 2. Income Effect 3. Substitution Effect

Reasons that explain the law of Demand:

Utility is how much pleasure a consumer gets from a good.

!

It is measured in utils.

DIMINISHING MARGINAL UTILITY

Reasons that explain the law of Demand:

Each time you benefit from consuming a

good, economists say you are

experiencing marginal utility.

DIMINISHING MARGINAL UTILITY

Mmm! SO hungry!

Reasons that explain the law of Demand:

As a person increases consumption of a product, there is a decline in the marginal utility that person derives

from consuming each additional unit of that product.

LAW OF DIMINISHING MARGINAL UTILITY:

Burger 1 Burger 2 Burger 3

You are hungry! Eating the burger gives lots of

instant satisfaction!

You are still sort of hungry. Eating another

burger gives some satisfaction.

You are full! Eating the burger gives very little

satisfaction.

Utility Utility Utility

LAW OF DIMINISHING MARGINAL UTILITY:

LAW OF DIMINISHING MARGINAL UTILITY:

LAW OF DIMINISHING MARGINAL UTILITY:

“If one mint makes your breath smell fresh, why not eat fifty of them? Answer:

diminishing marginal utility. If exercising for one hour is good for your health, why not

exercise for 24 hours straight? Diminishing marginal utility. If a drop of perfume makes you smell nice, why not wear the whole bottle? You guessed it -

diminishing marginal utility!”

Reasons that explain the law of Demand:

As you consume more and more of a good, its marginal utility decreases. You will stop your consumption of the good in the short

run because it no longer satisfies you. Thus, the only way you will demand more of

the good is if the price decreases.

DIMINISHING MARGINAL UTILITY

P= QD P= QD

Reasons that explain the law of Demand:

The relationship between income and the quantity demanded is a positive one, as

income increases, so does the quantity of goods and services demanded.

THE INCOME EFFECT

Reasons that explain the law of Demand:

When income affects the buying patterns of individuals, the change is attributed to the

“income effect”

THE INCOME EFFECT

Reasons that explain the law of Demand:

The idea that as prices rise, consumers will replace more expensive items with less

costly alternatives.

THE SUBSTITUTION EFFECT

Reasons that explain the law of Demand:

THE SUBSTITUTION EFFECTWhen related products affect the buying

patterns of individuals, the change is attributed to the “substitution effect”

LAW OF DEMAND:

P= QD P= QD

DEMAND CURVE:A model that shows

the relationship between the quantity of goods and services

that people are willing to buy, and the ideal price of those

goods and services at any given quantity.

DEMAND CURVE:A demand curve can

represent the preferences of an entire group of

people, or the preferences of an individual.

of burgers

of b

urge

rs

This is how much I am

willing to pay for burgers!

DEMAND CURVE:When the price is 1$, how many burgers is Max going

to buy? !

What about when the price is 2$? or 3$?

of burgers

of b

urge

rs

This is how much I am

willing to pay for burgers!

The demand curve slants downward.

!

Remember “D”

for “down”!

P= QD P= QD

CHANGES IN PRICE:Changes in price result in movement along

the demand curve.

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f gum

)

QD (of gum)

I heard the price of a

pack of gum is rising!

CHANGES IN PRICE:Changes in price result in movement along

the demand curve.

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f gum

)

QD (of gum)

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f gum

)

QD (of gum)

P1

P2

CHANGES IN PRICE:We are only able to predict consumer preferences with the ceteris paribus

assumption in effect. 5 !4 !3 !2 !1

2 4 6 8 10

P (o

f gum

)

QD (of gum)

Remember, under ceteris paribus, “all else is constant.” This means that

nothing else besides the price is changing.

P1

P2

SHIFTS IN DEMAND:ONLY changes in price result in movement along the demand curve. Changes in other

factors can actually SHIFT the demand curve.

• Change in income !

• Change in preferences !

• Change in future expectations !

• Change in the price of a substitute or compliment good

SHIFTS IN DEMAND:Change in price = change in quantity demanded

Change in other factors = change in demand

P (o

f gum

)

QD (of gum)

P (o

f gum

)

QD (of gum)

Change in Price Change in other factors

SHIFTS IN DEMAND:Change in Income:

If Max gets a raise at work, he will

buy more of what he likes. This

appears as a shift in the demand

curve to the right.

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f gum

)

QD (of gum)

D1D2

What happens to the curve when Max gets a pay cut at work?

SHIFTS IN DEMAND:Change in

Preferences: If Max decides he does not like gum any more, he will buy less overall. This causes the

curve to shift left.

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f gum

)

QD (of gum)

D1D2

What happens to the curve when Max decides that gum is his favorite thing ever?

SHIFTS IN DEMAND:Change in

Future Expectations:

If Max hears that the price of gum is going to go up, he is willing to buy

more gum today.What happens to the curve when Max hears that the price of gum is going to

decrease?

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f gum

)

QD (of gum)

D1D2

SHIFTS IN DEMAND:Change in the

price of a substitute:

When the price of a substitute good

goes up, people will buy more of the

cheaper good, and demand goes up

(shifts right)What happens to the curve if the price of a substitute does down?

Substitute Goods: Goods that can be used for the same

purpose.

SHIFTS IN DEMAND:

Change in the price of a substitute:

“Super Chew” gum became more

expensive this week. As a result, the QD

of “Flavor Burst” gum increased.

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f FB

gum

)

QD (of FB gum)

D1D2

Because one item is more expensive, people will seek similar items and buy them instead.

SHIFTS IN DEMAND:

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f FB

gum

)

QD (of FB gum)

D1D2

Ask yourself: If the price of “Super

Chew” increased, will people buy

more or less Super Chew? Are Super Chew and “Flavor

Burst” substitutes? If people buy less SC, will they buy more

or less FB?

SHIFTS IN DEMAND:Change in the

price of a compliment:

When the price of a good goes up, people will buy

less of its complimentary goods as well.What happens to the curve the price of a compliment does down?

Complimentary Goods: Goods that are often used together (and therefore purchased

together)

SHIFTS IN DEMAND:Change in the

price of a compliment:

The price of iPhones decreased. The

quantity demanded of iPhone cases

increases.

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f cas

es)

QD (of cases)

D1

D2

What happens to the Qd of iPhone cases when the price of iPhones goes up?

SHIFTS IN DEMAND:Ask yourself: If the price of

iPhones decreased, will people buy more or less

iPhones? Are iPhone cases a compliment to iPhones? If people buy more iPhones, will they buy more

or less iPhone cases?

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f cas

es)

QD (of cases)

D1

D2

PRACTICE PROBLEM #1:How much candy is Maxine willing to

purchase at the price of 4$?

At the price of 1$

5 !4 !3 !2 !1

4 8 12 16 20

P (o

f can

dy)

QD (of candy)

PRACTICE PROBLEM #2:Max is at the store shopping for

shirts. He is about to buy one shirt at the regular price, then he notices it is on sale. He decides to buy two

additional shirts. !

Represent this situation with a demand graph.

PRACTICE PROBLEM #3:Maxine’s parents

decide to increase her allowance. How

will this influence maxine’s demand curve for candy?

Draw Maxine’s new D2 curve.

D15 !4 !3 !2 !1

4 8 12 16 20

P (o

f can

dy)

QD (of candy)

PRACTICE PROBLEM #4:Maxine hears that the weather will start to get cold tomorrow. How

does this affect her demand curve for ice

cream today?

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f ice

cre

am)

QD (of ice cream)

D1

PRACTICE PROBLEM #5:Max read a study that said that the

eating of ice cream can weaken your immune system. How might this influence Max’s

demand curve for ice cream?

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f ice

cre

am)

QD (of ice cream)

D1

PRACTICE PROBLEM #6:

The price of ice cream at the grocery store just decreased. How will this affect the demand curve

for chocolate syrup?

5 !4 !3 !2 !1P

(of s

yrup

)

QD (of syrup)

D1

2 4 6 8 10

PRACTICE PROBLEM #7:The price of frozen

yogurt at the grocery store just

decreased. How will this affect the

demand curve for ice cream?

5 !4 !3 !2 !1

2 4 6 8 10

P (o

f ice

cre

am)

QD (of ice cream)

D1

PRACTICE PROBLEM #8:Label the following pairs as either

substitutes or compliments:

1. Nail polish and nail polish remover 2. Cars and tires 3. Chicken and turkey 4. Sheets and pillowcases 5. Sweaters and sweatshirts