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Chapter 4

Chapter 4. Demand. What is Demand?. The ability, desire and willingness to buy something. Individual demand vs Market demand Demand Schedules vs Demand Graphs. Demand Schedule. The list of quantities you are willing to buy at each possible price. Demand Curve.

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Chapter 4

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  1. Chapter 4 Demand

  2. What is Demand? • The ability, desire and willingness to buy something. • Individual demand vs Market demand • Demand Schedules vs Demand Graphs

  3. Demand Schedule • The list of quantities you are willing to buy at each possible price.

  4. Demand Curve • The visual representation of the demand schedule

  5. Demand Curve • Will always slope down • Why?

  6. Law of Demand • When the price goes up, quantity demanded goes down. • When the price goes down, quantity demanded goes up.

  7. Market Demand

  8. Demand Curve Price Quantity

  9. Marginal Utility • The extra satisfaction from one more unit of product • If one is good, is two better? • Is three?

  10. Diminishing Marginal Utility • At some point we don’t receive the same utility from another unit. • E.g. The 10th unit doesn’t make us as happy as the 1st one did. • We are willing to pay a little less for each extra unit.

  11. Change in Quantity Demanded • A change in QUANTITY Demanded only occurs when the price changes. • If the price increases then Quantity Demanded decreases, and vice versa. • This is partly because of the Income effect • When prices decrease, we feel richer • Our money goes farther than before

  12. Change in Quantity Demanded • This change is illustrated by a MOVEMENT along the line.

  13. Changes in Demand (TIPSE) • Tastes • Incomes • Population • Substitutes & Complements • Expectations

  14. Change in Demand • The price has NOT changed • You are now willing to buy more/less of a product at every possible price

  15. Change in Demand • This creates an entirely new curve

  16. Change in Demand • Increase in demand = shift right • Decrease in demand = shift left

  17. Why Demand Changes Consumer Income • Change in consumer income can cause a change in demand • When income goes up, you can afford to buy more

  18. Change in Demand • Population (Number of Buyers): An increase in the number of buyers in a market area results in higher demand • A decrease results in lower demand • How do buyers increase and decrease?

  19. Change in Demand • Tastes and Preferences of consumer: People’s preferences affect how much of a good they buy. • A change in favor of a good moves the curve to the right • A change NOT in favor of the good moves the curve to the left

  20. Why Demand Changes Substitutes • Products used in place of other products. • the demand for a product tends to increase if the price of its substitute goes up

  21. Why Demand Changes Complements • the use of one increases the use of the other • Personal computers and software are two complementary goods.

  22. Why Demand Changes Change in Expectations • “Expectations” refers to the way people think about the future. • If future shortages of a product are predicted, this might cause demand to increase,

  23. To Shift or Not To Shift…. Right Shift No Does the Price Change? Increase or Decrease? Yes Movement Left

  24. What do the letters stand for? (TIPSE) • T • I • P • S • E

  25. Elasticity • An important cause-and-effect relationship in economics • Elasticity is a measure of HOW MUCH we respond to price

  26. Demand Elasticity • We know how much price changes but how much does that change quantity demanded? • Elasticity tells us just how sensitive consumers are to price changes.

  27. Elastic Demand • demand is elastic when a given change in price causes a larger change in quantity demanded. • E.g. fresh garden vegetables • prices are lower in the summer, consumers increase the amount they purchase.

  28. Inelastic Demand • a change in price causes a smaller change in the quantity demanded • E.g. Table Salt • If the price of salt was cut in half, the quantity demanded would not increase by much • If the price doubled, we would expect consumers to demand about the same amount

  29. Elastic or Inelastic • Change in Price > Change in Quantity = Inelastic • Change in Price < Change in Quantity = Elastic

  30. Determinants of Demand Elasticity • There are three questions we can ask to determine whether the demand is elastic or inelastic. • Can the purchase be delayed? • Are adequate substitutes available? • Does the purchase use a large portion of income?

  31. Can the Purchase Be Delayed? • Sometimes a consumer’s need urgent and cannot be put off • When this happens, demand tends to be inelastic • Being able to delay the purchase is a characteristic of elastic demand.

  32. Are Adequate Substitutes Available? • If substitutes are available, consumers can switch back and forth to take advantage of the best price. • The fewer substitutes available the more inelastic the demand • More substitutes = more elastic

  33. Does the Purchase Use a Large Portion of Income? • Whenever the answer is yes, then demand tends to be elastic. • Demand tends to be inelastic whenever the answer to this question is no

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