DemandChapter Four

microeconomics

● Microeconomics:● study of small units, such as individuals and firms.

● Decisions made by:● People● Families● Clubs/organizations● Small businesses

*these decisions help shape bigger decisions, like prices

what is demand?

● To Demand: Being willing and able to buy a good or service

● calculating the level of Demand involves two variables:● Quantity of a product (how many will people buy?)● Price of a product (how much will people pay?)

How many of you would want to buy one peanut butter and jelly sandwich for the price of $2.00?

How many of you would want to buy one peanut butter and jelly sandwich for the price of $0.50?

What creates demand?

Advertising, fashion trends, and new product introductions serve to create

consumer demand

The law of demand

●For most products and services: ● Price increase = less quantity demanded●Price decrease = more quantity demanded

The individual demand schedule

The individual demand schedule shows a consumer’s quantity demanded of a good at all prices that might prevail in the market.

Peanut butter and jelly sandwich sales

Price per sandwichQuantity of sandwiches

demanded by Riker

$0.50 10

$1.00 9

$1.50 8

$2.00 7

$2.50 6

$3.00 5

$3.50 4

$4.00 3

The individual Demand CurveThe Individual demand curve is a graphical representation of the

individual demand schedule.

2 3 4 5 6 7 8 9 10 11$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50

Peanut butter and jelly sandwich sales

Quantity of sandwiches demanded by Riker

$Pri

ce p

er s

and

wic

h $

The market demand curve

● We know that individual demand is the Q demanded at each P for an individual● But what good is an individual curve to a company?

● The market demand curve shows the demand of ALL consumers in a particular market

Riker’s demand

P Q

$4 3

$1 9

Sally’s demand

P Q

$4 5

$1 20

Mike’s demand

P Q

$4 0

$1 5

Market demand

P Q

$10 8

$1 34

What can change the amount of quantity demanded?

● A change in Price!!● More $$ = less quantity demanded● Less $$ = more quantity demanded

● Two effects of price change that cause demand to inc/dec are: ● The income effect – when a price changes, our disposable income goes

up or down. ● The substitution effect – a price change that makes other products look

more/less costly

*these are changes that appear along the demand curve

Change in Quantity demandedmovement along the curve

A

B

What can shift the demand curve?

● Change in demand (shifts the curve). ● Any change other than price

● TRIBE● Taste – Consumer’s tastes change due to advertising,

trends, rumors, new products

● Related goods’ prices● Substitutes – products that can be used interchangeably

● Complements – products used together

Change in demand cont.

● Income – more income = more demand

● Buyers - Number of consumers in the market

● More consumers = more demand

● Expectations – changing buying habits based on

what is expected to happen to prices in the future.

*these are changes that appear in a totally new

demand curve, in a different position on the graph

Riker invites friends for lunch (change in # of buyers)

Price Quantity Demanded by riker

Riker + friends demand

$4.50 0 0

$4.00 3 5

$3.50 4 6

$3.00 5 7

$2.50 6 8

$2.00 7 9

$1.50 8 10

$1.00 9 11

$0.50 10 12

Riker and Friends’ demand for PBJ’s

and friends

Demand Elasticity:

●consumers react to change in price by changing the quantity demanded ●However: the size of the reaction will vary depending on the product in question.

●Elastic demand: a change in price causes a relatively larger change in quantity demanded.

●Inelastic - change in price causes a relatively smaller change in the quantity demanded.

Elasticity

A fast food meal

toilet paper

Which of the above goods would be affected most by a price change?

Elasticity

Elastic Inelastic

Which of the above goods would be affected most by a price change?

Elasticity

● So how can we determine elasticity?● Is the purchase necessary? ● Yes:● No:

● Are equally good substitutes available? ● Yes● no

Elasticity

Freshveggies

cup of coffee

gasoline from a particular

station

gasoline in general

Is the purchase necessary?Y: inelasticN: elastic

Are there Substitutes?Y: elasticN: inelastic

Type of elasticity

N N N Y

Y Y Y NE E E IE

SupplyChapter Five

What is Supply?

● The willingness and ability of a supplier to produce a product.

The law of supply:● Suppliers will offer more of a product for

sale at higher prices than at lower prices.

Supply schedule (individual)

●Chart showing how much a producer is willing to supply at all possible prices.

Price per PBJ Quantity of PBJ’S

4.50 11

4.00 10

3.50 9

3.00 8

2.50 7

2.00 6

1.50 5

1.00 4

.50 3

The supply schedule (individual)

2 3 4 5 6 7 8 9 10 11 12$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00

Market for PBJ’s

Quantity of PBJ’s supplied by Riker’s sandwich shop

Pri

ce p

er P

BJ

The Market Supply schedule

● The market supply curve shows the supply offered by all companies in a market.

● To find market supply, add together all companies’ supply.

Market supply schedule

Quantity of PBJ’s Supplied byAll Firms in the Market

How many PBJ’s are supplied if the price is $2.50 per sandwich?

Price Firm X Firm Y Firm Z$4.50 50 500 1,000$4.00 40 400 900$3.50 30 300 800$3.00 20 200 700$2.50 10 100 600$2.00 5 50 500

What can cause a change in quantity supplied?

● a change in price leads to a change in quantity supplied

● a change in quantity supplied is shown by movement along a supply curve.

The supply schedule (individual)

2 3 4 5 6 7 8 9 10 11 12$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00

Market for PBJ’s

Quantity of PBJ’s supplied by Riker’s sandwich shop

Pri

ce p

er P

BJ

What can move the supply curve?

Anything that makes it more/less expensive to produce the good or service

ROTTEN● Resources– cost and availability (land, labor, capital)● Other goods’ prices – substitutes/complements● Taxes, subsidies, government regulation● Technology and productivity ● Expectations of the producer● Number of firms in the industry

The government taxes Peanut butter

Elasticity of Supply

● A measure of how the supply of a product responds to a price change.

● Elastic supply – a big change in supply

● Inelastic supply – a small change in supply

Elasticity of Supply

● So what determines elasticity of supply?● The only large determinant is production, so

we ask this question:

Can a company adjust quickly to a new price?

If YES, then the product is elastic.

If NO, then the product is inelastic.

Elasticity of supply

●Which one has inelastic supply?

Elasticity of Supply

● Hershey Kiss● Doesn’t take a lot of capital to make● Not a highly skilled process● Made by machines● Quick process

ELASTIC

Elasticity of Supply

● Nuclear power● Highly skilled process● Lots of capital needed● Technologically difficult● Extensively regulated

INELASTIC