Demand

Supply and Demand

Economics in a market economy, at its most basic & fundamental form is SUPPLY & DEMAND.

Demand Perspective

Economics from the perspective of the consumer

DEMANDQuantity of goods and services that a consumer is WILLING and ABLE to purchase at various prices

DEMAND – 3 Components

Able

Willing

Quantities Purchased at Various Prices

Demand - AbleYou must have enough money to make the purchase. If you can’t afford something (a private jet, for instance), you don’t have an effective demand for it.

DEMAND - WillingYou must be willing to make the purchase. If you’re not willing to spend your income on it, you do not have an effective demand for it.

DEMAND - Quantities purchased at Various Prices

Qty Demanded changes when price changes

Demand Schedule

List of quantities that would be purchased at various prices in table format

Demand Schedule

PriceQuantity Purchased Weekly

$20

$25

$30

$35

21

18

15

12

Demand CurveDemand curve plots these (from Demand Schedule) points

Shows graphically the relationship between price & quantity demanded

Demand CurveVertical Axis - PricesHorizontal Axis - Quantity Demanded

Law of DemandInverse Relationship Between Prices and Quantity Demanded:Price Increases -> Less Quantity

DemandedPrice Decreases -> More Quantity

Demanded

Demand Curve (Inverse Relationship)

Demand

Price

Quantity

Reasons Why The Demand Line Is

Downward SlopingLaw Of Diminishing

Marginal Utility

Income Effect

Substitution Effect

Marginal UtilityMarginal – A small change

Utility = Usefulness or Satisfaction

Marginal Utility is the amount of satisfaction derived from 1 additional unit of a product

Law of Diminishing Marginal Utility

As additional units of a product are consumed during a given period of time, the additional satisfaction derived from the good decreases

Law of Diminishing

Marginal UtilityUtility

Units of Goods

Proves Inverse Relationship between Prices and Quantity

Demanded b/c…

At higher quantities, people want it less and so they’ll be less willing to pay higher prices

Income EffectThe effect that increasing or decreasing prices have on the purchasing power of your income

Income Effect Cont’dWhat’s the Purchasing Power of $5 (your income) for the items on the dollar menu?

allows you to be able to purchase 5 items

What if the dollar menu became the half dollar menu?

What if the dollar menu became the $2 menu?Price changes affect the buying power of your INCOME & thus your ability & willingness to purchase products

At Higher Prices, people’s incomes will be ABLE to buy LESS

Proves Inverse Relationship between Prices & Quantity

Demanded b/c…

Substitution EffectChange in the combination of goods purchased as a result of increasing or decreasing relative prices

Substitution Effect Cont’d

What might people do if the price of movie theater tickets go up to $15?

Get more Angel Tickets

Buy more DVDs

Go see more Plays or Stand-Up Comedy Acts

At higher prices, people will substitute that product with cheaper substitutes

Proves Inverse Relationship between Prices & Quantity

Demanded b/c…

Homework: “Demand 3 Paragraphs”

Explain in your own words each in a separate paragraph The Income EffectDiminishing Marginal UtilityThe Substitution Effect

Each of the paragraphs must include an ORIGINAL example that is explained

Determinants of Demand

Change in Quantity

Demandedv.

Change in Demand

Change in Quantity Demanded

Caused by an increase or decrease in PRICE

Causes movement ALONG the demand line

Price

Quantity Demanded/Purchased

Point A

Point B

Change in DemandCaused by 1 or more determinants of demand

Causes a shift of the ENTIRE demand line

Price

Quantity Purchased/Demanded

Determinants of Demand

Demand changes even if there is no change in price

It will shift the entire demand line

The Determinants

Consumer income

Consumer attitude

Price of a complimentary product

Price of a substitute

Population

Weather

Expectations

Change in IncomeGenerally, an increase in income leads to an increase in demand. This is b/c consumers are more willing and able to buy more products

Can you think of any products that would be an exception to this statement?

Change in Income Cont’dNormal goods- Demand increases as income increases

Inferior goods- Demand decreases as income increases. Ex. Ground Meat

Change in Income Cont’d

If someone who was unemployed for 2 yrs finds employment at a solid-paying job, what will happen to his/her demand for normal goods?

What will happen to his or her demand for inferior goods like canned goods from a generic producer?

Changing Attitudes

Tastes and Preferences

Trends

Fads

Changing Attitudes Cont’d

List in your notes 5 examples of trends and fads that have come and gone or are currently in but you expect will end in the near future

Trends/Fads That Have Come and Gone

Change in Price of a Complementary

GoodComplementary goods- Products that are used together.

List 4 Examples

Complimentary Goods Cont’d

If the price of peanut butter was to increase, what would happen to the qty demanded for peanut butter?

Qty Demanded for Peanut Butter will DECREASEWhat will happen to the demand for Jelly?

Demand for Jelly will DECREASE

Complimentary Goods Cont’d

If the price of Hot Dogs decreases, what will happen to the qty demanded for Hot Dogs?

Qty Demanded for Hot Dogs will INCREASE

What will happen to the demand for Hot Dog Buns?

Demand for Hot Dog Buns will INCREASE

Change in Price of a Complimentary Good

Cont’d

If qty demanded changes (up or down) for an original good, than the demand changes for the complimentary good in the SAME way

Complimentary Goods Cont’d

In Price for an Original Good

Qty Demanded for the Original Good

Demand for the Complimentary Good

The OPPOSITE of each is TRUE

Change in Price of a Substitute

Substitute goods- Products similar enough they can replace the other

List 4 Examples

Substitute Goods Cont’d

If the price of margarine goes up, what will happen to the qty demanded for margarine?

Qty demand for margarine will DECREASEWhat will happen to the demand for butter?

The demand for butter will INCREASE

Changing Price of Substitute

If qty demanded changes (up or down) for an original good, than the demand changes for the Substitute good in the OPPOSITE way

In Price for an Original Good

Qty demanded for the Original Good

Demand for the Substitute Good

The OPPOSITE of each is TRUE

Substitute Goods Cont’d

Population Changes

Changes to population #s is a determinant of demand. Why? In your notes, explain why population changes would have an effect on demand. Use 1 example and explain it.

Weather

Weather is a determinant of demand. Why? In your notes, explain why weather would have an effect on demand for many products. Use 1 example and explain it.

Expectations For Future Income

When consumers are pessimistic about their future incomes, the overall level of demand for goods and services in the economy decreases. The opposite is true.

Expectations Cont’d

Expectations for Future Income

=Demand for goods and services

Expectations for Future Income

=Demand for goods and services

In

Times Past

Really Good

White

Beans

Existed

Income

Tastes & Preferences

Related Goods

• Change in Price of Substitute Goods• Change in Price of Complementary Goods

Weather

# of Buyers

Expectations

Demand Shifts &

Elasticity of Demand

The Determinants of Demand change demand at EVERY price

This can be represented on a Demand Graph

Graph: Increase in Demand - Right

Using your first graph and a pencil, draw a second line that would represent an INCREASE in demand. Name this line D2

Graph: Decrease in Demand - Left

Using your second graph and a pencil, draw a second line that would represent a DECREASE in demand. Name this line D2

Hold up the appropriate shift that represents the effect of the

comeback of bell-bottoms

Demand Curve: Tastes and Preferences

Price

Quantity

D1

D2

Hold up the appropriate shift

that represents the effects of a job

demotion due to a business

consolidation

Decrease in Demand: Income

Price

Quantity

D2D1

The price of Pepsi goes up.

Hold up the appropriate shift that represents effect on

Coca-Cola

Substitutable Goods: Demand will go up for

Coke

Price

Quantity

D1D2

Price Elasticity of Demand

Draw two graphs (both on the same side of the paper), one with a steep slope and one with a gradual slope

ElasticityElasticity means RESPONSIVENESS

We measure responsiveness

Price Elasticity of Demand

Measurement of how responsive the quantity purchased changes when there is a change in price

Price Elasticity of Demand Cont’d

Equation: % change in quantity

demanded

% change in price

Demand ElasticThere are products where if the price changes, the Qty Demand will change SIGNIFICANTLY.

These products are said to have ELASTIC demand

Elastic DemandPrice is elastic if calculated value of price elasticity (equation) is greater than one

Products W/ Elastic Demand

Non-necessity

There are readily available substitutes for the product

The product’s cost represents a large portion of consumers’ income Car

Lunch Meat

Movie Theater Tickets

Elastic Demand

Price

Quantity

D

Inelastic DemandInelastic implies less sensitivity to change in pricePrice inelastic if calculated value of price elasticity (equation) is less than one

As the price of a good increases the quantity demanded decreases minimally

Products w/ Inelastic Demand

A Necessity

There are few or no readily available substitutes for the product

The product’s cost represents a small portion of consumers’ income

Water

Gasoline

Candy

Inelastic Demand

Price

Quantity

D

Unitary Price Elasticity (Unit

Elastic)% change in the quantity demanded equals % change in price

Total Revenue

Total amount of money a company receives from its sales

Total Revenue = price x quantity sold

Quantity sold is dependent on price

Relationship between Price, Elasticity, Total

Revenue Elastic Demand Inelastic Demand

Decreasing Price Increases Total Revenue

Decreasing Price Decreases Total Revenue

Increasing Price Decreases Total Revenue

Increasing Price Increases Total Revenue