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The Economics of Demand
The Demand Curve Elasticity of Demand Changes in Demand
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Demand Why are newspapers sold in vending
machines that allow you to take more than one copy?
How much do you eat when you can eat all you want?
What cures ‘spring fever’? What economic principle is behind the
saying, “Been there, done that”? Why do higher cigarette taxes cut smoking
by teens more than by other age groups?
Consider
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The Demand Curve Explain the law of demand Interpret a demand schedule and
demand curve
Objectives
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The Demand Curve demand law of demand marginal utility law of diminishing marginal utility demand curve quantity demanded individual demand market demand
Key Terms
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Demand
Demand indicates how much of a product consumers are both willing and able to buy at each possible price during a given period, other things remaining constant.
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Law of Demand
The law of demand says that quantity demanded varies inversely with price, other things constant. Thus, the higher the price, the smaller the quantity demanded.
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Law of Demand Demand, wants, and needs Substitution effect
The change in the relative price (the price of one good relative to the prices of other goods) causes the substitution effect
If all prices changed by same margin, there would be no substitution effect
Income effect Money income – the number of dollars you receive per period Real income – measure in terms of how many goods and services
you can buy
Diminishing marginal utility Marginal utility – additional satisfaction you derive from each item Law of marginal utility you derive from each additional item
consumed decreases as your consumption increases (example: pizza slices)
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Demand Schedule and Demand Curve Demand versus quantity demanded
Individual demand
Market demand
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Demand SchedulePrice Quantity Demanded
per Pizza per Week (millions)
a $15 8
b 12 14
c 9 20
d 6 26
e 3 32
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8 14 20 26 32Millions of pizzas per week
$15
12
9
6
3
0
Pri
ce p
er p
izza
Demand Curve for Pizzaa
b
c
d
e
D
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$12
8
4
1
(c) Chris
$12
8
4
1 2
(b) Brianna
$12
8
4Pri
ce
1 2 3 Pizzas (per week)
(a) Hector
Individual Demand for Pizzas
dH dB dC
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$12
8
4Pri
ce
1 2 3 Pizzas (per week)
(d) Market demand for pizzas
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Market Demand for Pizzas
dH dB dC D+ + =
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Elasticity of Demand Compute the elasticity of demand and
explain its relevance. Discuss factors that influence
elasticity of demand.
Objectives
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Computing the Elasticity of Demand Elasticity of demand measures the
percentage change in quantity demanded divided by percentage change in price.
Elasticity of
demand
=
Percentage change in quantity demanded
Percentage change in price
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Computing Elasticity of Demand Elasticity values
>1 it is elastic Percentage change in price will result in larger percentage
change in the quantity demanded =1 it is unit-elastic <1 it is inelastic Demand is usually more elastic at higher prices and
less elastic with lower prices Elasticity and total revenue
Price x’s quantity demanded at that price
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8 14 20 26 32Millions of pizzas per week
$15
12
9
6
3
0
Pric
e pe
r pi
zza
The Demand for Pizza
D
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Determinants of Demand Elasticity Availability of substitutes
The greater the availability of substitutes for a good, the greater the good’s elasticity of demand
Share of consumer’s budget spent on the good Increase in prices reduced the demand because people are not
both willing and able to purchase @ higher prices A matter of time
The longer the adjustment period, the greater the consumer’s ability to substitute
Some elasticity estimates The elasticity of demand is greater in the long run because
consumers have more time to adjust
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50 75 95100 Millions of gallons per day0
$1.25
1.00
Pric
e pe
r gal
lon Dy
Dm
Dw
Demand Becomes More Elastic Over Time
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Selected Elasticities of Demand
ProductProduct Short RunShort Run Long RunLong Run
Electricity (residential) 0.1 1.9
Air travel 0.1 2.4
Medical care and hospitalization 0.3 0.9
Gasoline 0.4 1.5
Movies 0.9 3.7
Natural gas (residential) 1.4 2.1
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Other Determinants of Demand Consumer Income The prices of related goods The number and composition of
consumers Consumer expectations Consumer tastes
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Changes in Consumer Income If income ↑, consumers willing and
able to buy more which ↑ demand Demand curve shifts to the right
Two categories of goods: Normal goods – demand increases as
money income increases Inferior goods – demand decreases as
money income increases Examples: used clothing, bus rides, etc.
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Changes in the Prices of Related Goods Substitutes
Decrease in price of one item will reduce the demand for a substitute Example: Tacos and Pizza
Complements Certain goods used together
Example: airline tickets and car rentals A decrease in the price of one shifts the
demand of the other rightward
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Changes in Prices of Related Goods (cont) Changes in size or composition of the
population will increase demand and shift the curve to the right
Changes in consumer expectations can shift the demand curve to the left or the right
Changes in consumer tastes Tastes are your likes and dislikes as a consumer
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Movement along the Curve Movement vs. Shift
A change in price, causes a movement along the demand curve, changes the quantity demanded
A change in one of the determinants of demand other than price causes a shift of a demand curve
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Extensions of Demand Analysis Role of time
Your willingness to pay more for time-saving goods depends on the opportunity cost of your time!