Demand

Chapter 3

What is demand?

• The willingness and ability to purchase a good or service

• Demand = Willingness and ability to purchase

The Law of Demand

• As a price of a good increases the quantity demanded of the good decreases and vice versa

– Quantity Demanded – is there a difference between demand and quantity demanded?

» A demand for popcorn» Buying the popcorn 2 bags for 1 dollar is quantity

demanded

Opposite Directions

• Why do price and quantity demanded move in opposite directions?– Law of diminishing marginal utility

• Candy experiment

– As you obtain less utility from additional units you will only buy large quantities at low prices

Demand Schedule

• Law of Demand says…– The up / down relationship is inverse

relationship– A chart showing the inverse is a demand

schedule

Demand Curve

• 3-1 b shows the demand curve– Plotting connected points to show patterns– There are almost always patterns in

economics

What happens when said curve shifts?

• Demand curves shifting right or left show more or less demand of a product at price

• What causes these shifts?

Income

• As income goes up, people have the ability to purchase more of a good– This doesn’t necessarily mean they will

• Normal Good – income goes up, purchase of that good goes up

• Inferior Good – income goes up, purchase of that good goes down

• Neutral Good – income goes up, purchase of that good stays the same

Preferences

• People prefer certain products– Types of video games

Prices of Related Goods

• Substitute Goods– Cars – Coffee / Tea – Video Games

• Complements– Things that go together

• Balls / Bats• PS2 / Games• Cars / Tires

Number of Buyers

• Certain goods are demanded more in certain areas– Surfboards / CA v. SD

Change in Demand v. Change in Quantity Demanded

• A change in demand refers to a shift in the curve

• Change in quantity demanded = A movement from one point to another point on the same demand curve

Responsibilities of Buyers

• Researching

• Ethics in paying

Section 3

• Elasticity of Demand– Relationship between percentage change in

in quantity demanded and the percentage change in price

% Change in quantity demanded

Elasticity of demand = ----------------------------------------------------

% Change in price

Demand

• Elastic demand – when quantity demanded percentage changes more than the price

• Inelastic demand – when quantity demanded percentage changes less than the price

• Unit Elastic demand – when quantity demanded and price have similar relationships

Determinants of Elasticity

• The number of substitutes has great effects on elasticity– Heart Medicines– Breads

Luxuries v. Necessities

• Luxury – don’t need it to survive

• Necessity – Food, medicine…– Which goods are elastic?

Percentages of Income

• Making budgets on any level, percent of income is studied

• Obvious which goods are more responsive to

• Relationship to Time– Changing to adapt and adjust over time

What does it matter?

• All versions of elasticity matter, because they relate to total revenue

Case 1

• A rise in price does not necessarily mean a rise in revenue

Elastic demand + Price rise = TR Decrease

Case 2

• If demand is elastic and price is decreased, revenue will go up– Elastic Demand + Price Decline = TR Increase

Case 3

• Inelastic demand + Price Rise = TR Increase• If demand is inelastic a price rise will lead to a

revenue increase

Case 4

• If demand is inelastic and price declines, total revenue will decrease

• Inelastic demand + Price decline = TR Decrease

Unit Elastic

• Equal forces in opposite directions

• No change to total revenue