chapter 3- presentation 1 demand. law of diminishing marginal utility each buyer of a product will...
TRANSCRIPT
Chapter 3- Presentation 1
Demand
Law of Diminishing Marginal Utility
• Each buyer of a product will get less utility from each extra unit consumed
• Consumers will only buy more units if the prices become progressively cheaper
• Ex- the 4th Big Mac will give less satisfaction than the 3rd, 2nd, 1st
Demand
• A schedule or curve that shows how much of a product that consumers are willing and able to purchase at a each of a series of possible prices at a specified period of time
Quantity Demanded
• The amount of a good or service that buyer(s) want to purchase at a particular price during some time period
Law of Demand
• Ceteris Paribas, as price falls, the quantity demanded rises, and as the price rises, the quantity demanded falls.
• ***inverse relationship between price and quantity demanded
• Ex- if the price of Nike goes up, and Adidas and Reebok stays the same, less Nikes will be purchased
Individual DemandRemember- Demand goes Down
6
5
4
3
2
1
0 10 20 30 40 50 60 70 80 Quantity Demanded (bushels per week)
Pri
ce (
per
bu
shel
)
P Qd
$5
4
3
2
1
10
20
35
55
80
IndividualDemand
P
Q
D
Individual Demand
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Pri
ce (
per
bu
shel
)
P Qd
$5
4
3
2
1
10
20
35
55
80
IndividualDemand
P
Q
D1
2 4 6 8 10 12 14 16 18
Demand Can Increase or Decrease
Decrease in Demand
D2
D3
An Increase in DemandMeans a Movementof the Line
A Movement BetweenAny Two Points on a
Demand Curve is Called a Change in
QuantityDemanded
Explanations for the Law of Demand
• 1. Common sense- the lower the price, the more people will buy (hence clearance sales)
• 2. Diminishing Marginal Utility• 3. Income and Substitution Effects
Income Effect
• A lower price increases the purchasing power of a buyer’s income
• A higher price has the opposite effect
Substitution Effect
• At a lower price, buyers will substitute a good in exchange for the higher priced alternative and vice versa
• Ex- If the price of chicken lowers, the buyer will buy less beef, pork etc.
http://www.reffonomics.com/TRB/chapter4/quantitydemanded.swf
Quantity Demanded v Demand
Market Demand
• Assume all the buyers in a market are willing and able to buy the same amounts of a product at each of the possible prices
• ***adding/multiplying the individual quantities demanded
Changes in Demand
• A new demand curve is drawn
• Shift to the left for a decrease and right for an increase in demand
Determinants of Demand
• Changes In: TRIBE
• T- Tastes
• R- Related Goods’ Price
• I- Income of Buyers
• B- # of Buyers
• E- Expectations of the Future
Normal (Superior) Goods
• As income increases, consumers buy more of a good
• Direct relationship
• Ex- steaks, luxury cars
Inferior Goods
• As income increases, demand for the goods falls
• Inverse relationship
• Ex- Ramen noodles, cheap beer, retread tires
Substitute Goods
• one that can be used in place of another good
• An increase in the price of one good will increase the demand of its substitutes and vice versa
Complementary Goods
• One good that is used together with another good
• If the price of one goes up, the demand for the complement will decline and vice versa
• Ex- Peanut butter and Jelly, tuition and textbooks