demand notes
TRANSCRIPT
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3CHAPTER DemandDemand
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Demand
Demand (D) = Willingness and ability to purchase
Are you part of demand if you want something?
No, you must be able to purchase.
Are you part of the demand for skateboards if you are an 80-year-old billionaire?
Probably not. You would be able, but not willing, to buy a skateboard.
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Markets
Market = a place where people buy and sell goods and services
Are these markets?
Swap meet
Internet shopping site
Mall
Fast food restaurant
Any place you purchase goods or services is a market.
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Yes No
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Goods and Services
Good = tangible item you can purchase
Service = intangible item you can purchase
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Quantity Demanded Quantity demanded (Qd) = number of units
of a good purchased at a specific price
If CDs are $18Lisa buys 2 and Trevor buys 1
Quantity demanded is 3 (Lisa’s 2 + Trevor’s 1)
What is the difference between demand (D) and quantity demanded (Qd)?
Demand is the willingness and ability to buy. Quantity demanded is always a number.
At $18, Lisa and Trevor are both part of the demand for CDs. The quantity demanded is 3.
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Law of Demand
If the price (P) of a good increases, then quantity demanded (Qd) decreases.
If P then Qd
If P then Qd
NOTE: The Law of Demand shows that quantity demanded moves in the direction of the price.
opposite
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If the price (P) of a good decreases, then quantity demanded (Qd) increases.
Consumers are willing and able to purchase more at a lower price than at a higher price.
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Law of Demand (continued)7
The more utility* you receive from a unit of a good, the the price you are willing to pay for it.higher
The less utility you receive from a unit of a good, the the price you are willing to pay for it.lower
* utility - usefulness, satisfaction
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Law of Diminishing Marginal Utility8
Diminishing = declining
Marginal = additional
Utility = usefulness or satisfaction
Law of Diminishing Marginal Utility = As a person consumes additional units of a good, eventually the utility or satisfaction gained from each additional unit of that good will decrease.
+ +
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Demand Schedule9
Price (P) Quantity Demanded (Qd) (in $) (in units)
$4 1$3 2$2 3$1 4
At $3 what is the quantity demanded?
At $1 what is the quantity demanded?
$3 2
$1 4
Is this demand schedule an example of the Law of Demand?
YesIf P then QdIf P then Qd
$4 1
$1 4$1 4
$4 1
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$4 1
$3 2
$2 3
$1 4
Price(in dollars)
Quantity demanded
(in units)
Demand Curve10
Take another look:
$4 1
$3 2
$2 3
$1 4
4
3
2
1
0
Pri
ce (
in d
olla
rs)
Quantity demanded(in units)
1 2 3 4
A demand schedule can be made into a graph.
Both the demand curve and the demand schedule show the quantity demanded at each price level.
Demand Curve
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Pri
ce (
doll
ars
per
qua
rt)
0
$1
100 200 300 400 500 600Quantity demanded of orange juice (quarts)
Shifts in Demand Curves11
Demand can change or shift.
Demand increases Demand curve shifts rightwardDemand increases Demand curve shifts rightward
What has happened to demand?
Shift right = Demand increased
What has happened to demand?
Shift left = Demand decreased
D3
D2D1
Original demand curve
A BC
Demand decreases Demand curve shifts leftward
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What Causes Demand to Shift?12
Change in
1. income
2. preferences
3. prices of related goods
4. number of buyers
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Changes in Income13
Does having the ability to buy more mean you are willing to buy more?
No. It depends on the good.
Income increases
Income increases
Income increasesSmile Smile
Normal good
Inferior good
Neutral good
Buy more
Buy less
Buy the same
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Changes in Income14
An increase in income shifts the demand curve.
Normal good Shift right
Inferior good Shift left
Neutral good No shift
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D1
Quantity demanded
Pri
ce
Changes in Preferences15
If preferences increase for a good, then the demand shifts right.
D2
D3
If preferences decrease for a good, then the demand shifts left.
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Changes in Prices of Related Goods16
Substitutes = Similar goods. A change in price of one affects the demand for the other.
Pri
ce (
do
llar
s)
Pri
ce (
do
llar
s)
Quantity demanded of coffee (cups)
Quantity demanded of tea (cups)
0 5 10 15
1.50
2.00
Dc
DT1DT2
If the price of a good increases, what happens to the demand for its substitute?
Demand shifts right.
If the price of a good decreases, what happens to the demand for its substitute?
Demand shifts left.
The demand for a substitute good moves in the same direction as the change in price of the other good.
DT3
1.00
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Change in Demand for Complements17
Complements = Goods that are used togetherP
rice
(d
oll
ars)
Pri
ce (
do
llar
s)
Quantity demanded of tennis rackets
Quantity demanded of tennis balls
0 20 25
50
60
DTR
DTB1DTB2
If the price of a good increases, what happens to the demand for its complement?
Demand shifts left.
If the price of a good decreases, what happens to the demand for its complement?
Demand shifts right.
The demand for a complementary good moves in the opposite direction as the change in price of the other good.
DTB3
40
30
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Change in Number of Buyers18
D1
D2
D3
If the number of people in an area increases, what happens to demand?
It shifts right.
If the number of people in an area declines, what happens to demand?
It shifts left.
+
-
Quantity demanded
Pri
ce
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Pri
ce
0D1
A
Quantity demanded
Pri
ce
0D1
Change in Demand or a Change in Quantity Demanded
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Change in demand = shift in demand curve
Change in quantity demanded = movement from one point to another along the same curve
D2
B
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Quantity demanded
Pri
ce
0
D1
Quantity demanded
Pri
ce
0
D1
A
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D2
D3
If you only change price, what changes?
Quantity demanded
A change in demandWhat causes the demand curve to shift?
What are the four shift factors?
Changes in income, preferences, related goods, number of buyers
If you only change the price, does the demand shift?
No. It is a change in quantity demanded.
B
C
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Elasticity of Demand
Elasticity of demand explains the relationship between the percentage change in quantity demanded (Qd) and the percentage change in price (P).
Elasticity of Demand =
Percentage change in quantity demanded
Percentage change in price
Elastic Demand = the quantity demanded changes by a greater percentage than the percentage change in price
Quantity demanded (Qd) 15% and price (P) 10%
1510 = 1.5 greater than 1 = Elastic demand
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Elasticity of Demand (continued)
Inelastic Demand = the quantity demanded changes by a smaller percentage than the percentage change in price
Quantity demanded (Qd) 5% and price (P) 10%
510 = .5 less than 1 = Inelastic demand
Unit-elastic Demand = the quantity demanded changes by the same percentage as the percentage change in price
Quantity demanded (Qd) 10% and price (P) 10%
1010 = equal to 1 = Unit-elastic demand
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Determinants of Elasticity of Demand
Determinants Elastic Inelastic
Number of substitutes many few
Luxuries or necessities luxury necessity
Percentage of income smaller larger
Time to delay a purchase more less
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Elasticity and Total Revenue
Total Revenue (TR) = the amount of money the seller receives for selling a good
Item costs $1.00 each and you sell 100. Total revenue is $100.$1.00 x 100 = $100 TR
Elastic demand + Price rise = Total revenue decreases$1.00 ea x 100 units sold = $100.00 TR$1.10 ea x 85 units sold = $93.50 TR
Elastic demand + Price decline = Total revenue increases$1.00 ea x 100 units sold = $100.00 TR$ .90 ea x 120 units sold = $108.00 TR
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Unit-elastic demand + Price rise = Total revenue the same$1.00 ea x 100 units sold = $100.00 TR$2.00 ea x 50 units sold = $100.00 TR
Unit-elastic demand + Price decline = Total revenue the same$1.00 ea x 100 units sold = $100.00 TR$ .50 ea x 200 units sold = $100.00 TR
Inelastic demand + Price rise = Total revenue increases$1.00 ea x 100 units sold = $100.00 TR$1.10 ea x 95 units sold = $104.50 TR
Inelastic demand + Price decline = Total revenue decreases$1.00 ea x 100 units sold = $100.00 TR$ .90 ea x 90 units sold = $94.50 TR
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Quick CheckPrice
Quantity demanded
Satisfaction/Usefulness
Additional satisfaction
Buy and sell goods
P = 1
Qd = 2
P then Qd goes 3
P then Qd goes4
Utility = 5
Marginal utility6
Market 7
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Quick Check (continued)Good
Service
Diminishing marginal utility
inverse/opposite
Demand schedule
Demand curve
Tangible product 8
Intangible product9
Chart of demand 10
Graph of demand11
Law of decreasing satisfaction
12
P and Qd have a(n) relationship
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Quick Check (continued)vertical
horizontal
Willingness and ability to buy
As P then Qd As P then Qd
End of Chapter 3
End of Chapter 3
Price is on the axis
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Qd is on the axis
15
Demand 16
Law of demand17