ch 4: demand 4-1: what is...

CH 4: DEMAND

4-1: WHAT IS DEMAND?

Notes

LEARNING TARGETS

• I will demonstrate an understanding of the law of

demand, and demand vs. quantity demanded.

• I will demonstrate an understanding of the factors

that shift demand.

WHAT IS DEMAND?

• Demand is the willingness to buy a good or

service and the ability to pay for it

• Must have both elements for demand to exist

LAW OF DEMAND

• The law of demand states that when price

decreases, quantity demanded increases and that

when price increases, quantity demanded

decreases

• There is an inverse relationship

DEMAND SCHEDULE

• A demand schedule is a table (or listing) of how

much of an item an individual is willing to purchase

at each price

Price Quantity Demanded

$1 50

$2 40

$3 30

$4 20

DEMAND CURVE

• Demand curve (D): graphically shows the data

from a demand schedule

Q

P

D

INDIVIDUAL DEMAND SCHEDULE

• What can we learn from an individual demand

schedule?

• How much of an item one person is willing and

able to buy at a specific price

INDIVIDUAL DEMAND SCHEDULE

Price (per DVD) Quantity Demanded

$5 7

$10 4

$15 3

$20 2

$25 1

$30 0

INDIVIDUAL DEMAND CURVE

• According to the chart, I am not willing nor able

to buy any DVDs at $30

• But, I am willing and able to buy 7 DVDs if they

are $5 each

INDIVIDUAL DEMAND SCHEDULE AND CURVE

• Use the data below to create an individual demand curve

for DVDs

INDIVIDUAL DEMAND SCHEDULE AND CURVE

• Note: the vertical axis is always price (P) and the

horizontal axis is always quantity (Q) demanded

(of a particular product)

DRAW YOUR INDIVIDUAL DEMAND CURVE

MARKET DEMAND SCHEDULE

• A market demand schedule a listing of how much

of a good or service all consumers are willing to

purchase at each price

• Purpose: Business owners need a market

demand schedule in order to price a good to gain

the maximum number of sales

MARKET DEMAND SCHEDULE

Price (per DVD) Quantity Demanded

$5 300

$10 175

$15 150

$20 125

$25 100

$30 50

MARKET DEMAND SCHEDULE

• What can we learn from a market demand

schedule?

• At $30 quantity demanded is 50 DVDs

• At $5 quantity demanded is 300 DVDs

DRAW A MARKET DEMAND CURVE

4-2: WHAT FACTORS

AFFECT DEMAND?Notes

LAW OF DIMINISHING MARGINAL UTILITY

• The marginal benefit of using each additional

unit of a product during a given period of time will

decline

• Why?

HOW DOES THIS AFFECT THE

DEMAND CURVE?

• The demand curve slopes downward because an

individuals’ utility, or overall satisfaction,

decreases as they obtain more of a good or

service

EXAMPLE OF THE LAW OF DIMINISHING

MARGINAL UTILITY

• On a hot day, the ice cream truck comes through

your neighborhood

• You will most likely receive the most satisfaction

from the first ice cream bar you purchase rather

than the second, third, or fourth

WHY DO CONSUMERS DEMAND MORE GOODS

AND SERVICES AT LOWER PRICES AND

FEWER AT HIGHER PRICES?

• 2 reasons:

• 1. Income effect: the change in the amount that

consumers will buy because the purchasing

power of their income changes

• If you make more money you might consume

more expensive goods (and vice versa)

• 2. Substitution effect: change in the amount that

consumers will buy because they buy substitute

goods instead

• A different cereal brand is on sale, so you

substitute that for the one you normally buy

EXAMPLE

• Tara goes to the mall to buy a $50 pair of designer

jeans and discovers they are on sale for $35. If

Tara decides to buy 2 pairs, is this an example of

the income effect or the substitution effect?

• Answer: Income effect because the lower price of

the jeans increased the purchasing power of

Tara’s income

DEMAND VS. QUANTITY DEMANDED

• Demand: the curve that represents the schedule of

quantities consumers are willing and able to buy at

each price

• Quantity demanded tells us how much will be

bought at a specific price (a point on the

demand curve)

DEMAND VS. QUANTITY DEMANDED

DEMAND VS. QUANTITY DEMANDED

• A change in price changes quantity demanded—

this refers to movement along the demand curve

• A change in anything other than price that affects

the demand curve changes the entire demand curve

—this causes a shift in demand

GRAPHICALLY, WHAT DOES THIS MEAN?

DEMAND SHIFT FACTORS

• 1. Income: as income increases/decreases it

affects a person’s ability to purchase goods and

services

• When consumer incomes increase, they demand

more normal goods

• Example: new car, TV, etc.

DEMAND SHIFT FACTORS

• When consumer income increases, they demand

less inferior goods

• Examples: used books, off-brands

DEMAND SHIFT FACTORS

• 2. Market size/population: if the number of

consumers increases or decreases it also affects the

market size

• Example: a significant increase in population in

the Southwest will increase demand for housing

• Example: A decrease in population in a city would

decrease demand for housing

DEMAND SHIFT FACTORS

• 3. Consumer tastes/preferences: when a good/service is popular, consumers demand more of it at all prices

• When the product becomes less popular, consumers demand less of it

• Example: if turkey burgers become more popular because they are healthier, demand will increase

• Example: if skateboarding becomes less popular, demand will decrease

DEMAND SHIFT FACTORS

• 4. Consumer expectation of price: future

expectations can affect today’s buying habits

• If consumers believe the price of a good will

increase in the future, they consume it now

• If consumers believe the price of the good will be

decrease in the future they will wait to consume it

DEMAND SHIFT FACTORS

• Example: if you believe the price of a DVD will

increase in the future, you will buy it now—shifting

demand to the right (an increase in demand)

• Example: if you believe the price of shoes will

decreases in the future, you will buy them later—

shifting demand to the left (a decrease in demand)

DEMAND SHIFT FACTORS

• 5. Substitute goods: goods and services that can be

used in place of each other

• If the price of a substitute good drops, people will

buy that good and not the original item

• Example: The price of Kroger brand cereal drops so

we consume that rather than the higher priced name

brand

DEMAND SHIFT FACTORS

• 6. Complementary goods: goods that are used

together

• An increase in the demand for one good increases

the demand for the complementary good

• Example: an increase in the demand for hamburgers

increases the demand for ketchup

WHAT DO THE GRAPHS

FOR DEMAND LOOK

LIKE?

DRAWING THE GRAPH

AN INCREASE IN DEMANDP

Q

S1

D1

D2

Q1 Q2

P1

P2

DRAWING THE GRAPH

A DECREASE IN DEMANDP

Q

S1

D2

D1

Q2 Q1

P2

P1