Who Demand?Who Demand?

YOU YOU Demand!Demand!

The obligatory vocabulary.The obligatory vocabulary.

Demand microeconomics demand schedule demand curve Law of Demand market demand curve marginal utility diminishing marginal

utility*

How much is that doggie in the How much is that doggie in the window?window?

Demand is a willingness to buy a product at a particular price.

WAD = Willingness Ability + Desire *

So what does that mean?So what does that mean? People sometimes think of

demand as the desire to have or to own a certain product.

In this sense, anyone who would like to own a swimming pool could be said to “demand” one.

In order for demand to be counted in the marketplace, however, desire is not enough; it must coincide with the ability and willingness to pay for it.

Only those people with demand—the desire, ability, and willingness to buy a product-can compete with others who have similar demands.*

MicroeconomicsMicroeconomics Demand is a

microeconomic concept.• Microeconomics is the

area of economics that deals with behavior and decision making by small units, such as individuals and firms.

• Microeconomics helps explain how prices are determined and how individual economic decisions are made.*

The Law of DemandThe Law of Demand

The law of demand states that other things being equal, as the price of a good increases, the quantity demanded of that good decreases.

or

• The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. When price goes up, the quantity demanded goes down; when price goes down, the quantity demanded goes up. *

Demand CurvesDemand Curves Demand is the desire,

ability, and willingness to buy a product.

An individual demand curve illustrates how the quantity that a person will demand varies depending on the price of a good or service.

• Economists analyze demand by listing prices and desired quantities in a demand schedule (chart). When the demand data is graphed, it forms a demand curve with a downward slope.*

How do you measure How do you measure demand?demand?

Lots of market Lots of market research.research.

Check out pre-Check out pre-existing conditions.existing conditions.

Poll consumers.Poll consumers. Research past Research past

trends.trends.*

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

CD’sCD’s Lower prices result in more quantities demanded.Lower prices result in more quantities demanded. Higher prices are determined by lower demands.Higher prices are determined by lower demands. *Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

Figure 4.2Individual and Market Demand CurvesFigure 4.2Individual and Market Demand Curves

Now plot that.Now plot that.

There’s your There’s your demand curve.demand curve.

Price is always the Price is always the vertical axis.vertical axis.

Quantity Quantity demanded is demanded is always the always the horizontal axis.horizontal axis.

Demand curves Demand curves slope downwards. slope downwards. *

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

• A market demand curve illustrates how the quantity that all interested persons (the market) will demand varies depending on the price of a good or service. *

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

So?So? All of this data gives All of this data gives

you a general idea of you a general idea of the desire, willingness, the desire, willingness, and ability of people to and ability of people to pay.pay.

Then you have a Then you have a demand schedule.demand schedule.

This one is for shoes.This one is for shoes. The demand schedule The demand schedule

is a listing that shows is a listing that shows the quantity demanded the quantity demanded at all prices that might at all prices that might prevail in the market at prevail in the market at any given time.any given time. *

Law of Demand in action.Law of Demand in action. Day after Day after

Thanksgiving Sales Thanksgiving Sales (Black Friday)(Black Friday)

““Tax Free Weekends”Tax Free Weekends” Special days with Special days with

specials & lower prices specials & lower prices increase sales.increase sales.

That’s because price is That’s because price is an obstacle to buying. an obstacle to buying. *

Marginal UtilityMarginal Utility Marginal utility is the

extra usefulness or satisfaction a person receives from getting or using one more unit of a product.

• The principle of diminishing marginal utility states that the satisfaction we gain from buying a product lessens as we buy more of the same product. *

Quiz me Quiz me baby!baby!

Section 2 VocabularySection 2 Vocabulary

Change in quantity demanded

income effect substitution effect change in demand substitutes complements *

Don’t ask.

Demand changesDemand changes

Occasionally something happens to change people’s willingness and ability to buy.

• These changes are usually of two types: a change in the quantity demanded, or a change in demand. *

Change in quantity Change in quantity demanded.demanded.

Simply movement along the demand curve.

Caused by the Income Effect & Substitution Effect

The change in quantity demanded shows a change in the amount of the product purchased when there is a change in price. *

Figure 4.3A Change in Quantity DemandedFigure 4.3A Change in Quantity Demanded

Income EffectIncome Effect The income effect

means that as prices drop, consumers are left with extra real income.

Hopefully they’ll buy more of the product with the money they save.

The change in the amount purchased is the Income Effect. *

See, it’s SIMPLE!

Substitution EffectSubstitution Effect• The substitution effect

means that price can cause consumers to substitute one product with another similar but cheaper item.

Happens all the time at convenience stores with Coke and Pepsi products.

The substitution effect is the change in quantity demanded because of the relative change in price. *

Substitution EffectSubstitution Effect

Also applies to Also applies to services.services.

What are some What are some substitutions for an substitutions for an increase in movie increase in movie ticket prices? ticket prices? *

Change in DemandChange in Demand

Sometimes people Sometimes people are willing to buy are willing to buy different amounts different amounts for the same price.for the same price.

This is a This is a Change In Change In Demand.Demand.

The entire demand The entire demand curve shifts now. curve shifts now. *

Figure 4.4A Change in DemandFigure 4.4A Change in Demand

Notice how they are now willing to buy more at each and Notice how they are now willing to buy more at each and every price.every price.

Change can increase (shift right) or decrease (shift left). Change can increase (shift right) or decrease (shift left). *

So what causes a change?So what causes a change? TastesTastes (advertising) a change in IncomeIncome the number of buyers in

the MarketMarket changes size

consumer ExpectationsExpectations price change in a

Related productRelated product (either because it is a substitute or complement – think butter & margarine, film & cameras) *

Figure 4.4A Change in DemandFigure 4.4A Change in Demand

How about a quiz?How about a quiz?

Tough. You’re Tough. You’re taking one anyway! taking one anyway! *

Section 3 - Elasticity of Section 3 - Elasticity of DemandDemand

Main Idea: Main Idea: Consumers react differently to price changes depending on whether the good is a necessity or a luxury. *

Section 3 VocabularySection 3 Vocabulary

Elasticity demand elasticity Elastic inelastic unit elastic *

Demand ElasticityDemand Elasticity Tries to answer the Tries to answer the

question of how changes question of how changes in price change in price change quantities purchased.quantities purchased.

Elasticity measures how sensitive consumers are to price changes. *

2 Types of Elasticity2 Types of Elasticity

ElasticElastic Inelastic Inelastic *

This is Joe. He’s more elastic.

Elastic DemandElastic Demand

Demand is elastic when a change in price causes a large change in demand.

If milk drops down to $1 a gallon the demand will spike. *

Inelastic DemandInelastic Demand

Demand is inelastic when a change in price causes a small change in demand. *

Unit elasticityUnit elasticity

Unit elasticity means Unit elasticity means that any change in that any change in price is matched by price is matched by an equal relative an equal relative change in quantity. change in quantity.

In other words the In other words the revenue doesn’t revenue doesn’t change when the change when the price does.price does.

Don’t worry about Don’t worry about it.it.*

Figure 4.6Estimating the Elasticity of DemandFigure 4.6Estimating the Elasticity of Demand