DEMANDWhatcha Whatch Whatcha Whatcha

Want! (and are able to buy)

Demand

• The DESIRE, ABILITY, and Willingness of a consumer to buy a product. • Ex: just wanting a product does not mean

you have demand for it. I may want a Rolls Royce Car, but I do NOT have the ability to pay for it, so I do not have demand for it.

How is demand for a product measured?

• Demand is the amount of a good or service that consumers are willing and able to buy at a given price• Example: at $4 each, I may buy 5 books, but

at $10 each I may only buy 2. The quantity I demand shifts based on the given price.

Conditions of Demand

• 1. Consumers must be willing and able to buy the product.

• Demand for a House? Candy Bar? Lexus?

• 2. Demand can only be measured for a specific period of time because it changes.• What if I won the lottery tomorrow? Would

my demand for a House or a Lexus change?

The Law of Demand

• There is an inverse relationship between the price of a product and the quantity demanded by consumers.

• As the price of the product increases the quantity demanded decreases.

• As the price of the product decreases the quantity demanded increases.

• CD Example?

Income Effect

• A person’s ability to buy a product is determined by the size of his/her income relative to the price of the product.• Things seem expensive or cheap to you

depending on your income.

• Example: If I make $50,000 a year, I have a strong ability to buy a candy bar. However I do not have a strong ability to buy a $1 million house.

Income Effect, cont’d.

• If the price of a product goes down, the consumer’s income has a greater ability to buy the product. This is an increase in the quantity demanded. Therefore the consumer is likely to buy a greater quantity of the product.

• A lower price increases the purchasing power of your income

• Example?

Income Effect, cont’d.

• If the price of the product goes up, the consumer’s income has a weaker ability to buy the product. (a lower quantity demanded). Therefore, the consumer is likely to buy a smaller quantity of the product.

• A higher price decreases the purchasing power of your income.

• Example?

Substitution Effect

• A change in the quantity (amount) that a consumer will buy because they are buying substitute goods instead.

• Example: If coffee gets too expensive, I will switch to tea.

Diminishing Marginal Utility

• Can you remember, what is Utility??

• Marginal Utility: The happiness or satisfaction we receive from one additional unit.

• CANDY BAR EXAMPLE

• Diminishing Marginal Utility: The more we use or consume a product, the less use or satisfaction we receive from it.• Example: Buffet Restaurant

Law of Diminishing Marginal Utility

• As the price of a product decreases, the quantity demanded increases (that’s the law of demand) UNLESS or UNTIL, the consumer begins to experience diminished marginal utility.

• Basically: if you think something is cheap, you will keep buying a high quantity of it, until you do not feel any satisfaction from getting just one more.

Write your script

• Write out a brief script of a conversation between a buyer and a seller where as the price of a product decreases, the quantity demanded increases unless or until the consumer begins to experience diminished marginal utility.

Demand Schedules and Curves

• A demand schedule is a list of possible prices of a product and the corresponding quantity demanded.• Basically how much you would want of something at a

given price.

• A demand curve is a graph that illustrates the inverse relationship between price and quantity demanded.

• All demand curves slope downward from left to right showing that as priced decreases quantity demanded increases

A Demand Schedule• Price x Quantity = total revenue

• As price rises the quantity demanded falls

Price Per DVD

Quantity Demanded

30 50

25 75

20 100

15 125

10 175

5 30050 75 100 125 175 300

0

5

10

15

20

25

30

35Demand Schedule

Demand Schedule

Chart your own!Price per

shirtQuantity

demanded12 1010 208 306 404 502 60

Changes in Quantity Demanded

• Changes in the quantity demanded can ONLY be causes by changes in price

• Changes in the quantity demanded result in movement along the demand curve.

• Changes in the quantity demanded are explained by the law of demand which states that as price decreases, the quantity demanded increases.

•A change in price will result in movement along the curve (sliding up or down on the curve)

Changes in Demand

• Sometimes consumers will demand more or less of the product even though the prices HAS NOT CHANGED.

• A change in demand occurs whenever more or less of the product is demanded at every price.

• * A change in demand causes a SHIFT in the curve.

•Notice how the entire curve shifts out! D1D2

D1 D2

Non-Price Factors (Determinants) of Demand

• A change in demand can ONLY occur when there is a change in something other than price!

• An increase in demand causes

the curve to shift to the RIGHT

• A decrease in demand causes the

curve to shift to the LEFT

D1D2

P

Q

Q

P

Non-Price Determinants of Demand

• These are the ONLY things that can change demand!! A change in the price will only change the quantity (amount) you demand. These things change your willingness or ability to buy the product!

Consumer Tastes and Preferences

• When a good or service enjoys high popularity consumers demand more of it.

• Advertising: the strongest influence on consumer tastes

• Examples?

Consumer Income

• As a consumer’s income changes, so does their ability to buy products. (getting raises or getting your hours cut)

• Normal Goods: goods that consumers demand more of when their income rises (expensive clothing)

• Inferior Goods: goods that consumers demand less of when their income rises (used books, generic brand food)

Market Size (# of consumers)

• If the number of consumers increases or decreases the market size changes and affects demand.• Example: The Jersey Shore: demand for

pizza on the Jersey shore is very high from June-August, but drops A LOT the rest of the year.

Consumer Expectations

• What you expect about the future can affect your buying habits today.• Example: Wall Street employees get

bonuses at the end of the year so they wait until January to make major purchases

• Other Examples?

Price of Related Goods

• Substitutes: goods and services that can be used in place of each other. If the price of a substitute good drops, demand for the substitute will increase and demand for the original good will decrease. Ex. Coffee/tea

Prices of Related Goods

• Complements: goods that are used together so that a rise in demand for one, increases the demand for the other. Also if the price for one product rises, demand for both will fall.

• Example: Peanut butter and Jelly, Ipods and MP3s

Elasticity of Demand

• Elasticity of Demand: The extent to which changes in price cause changes in the quantity demanded.• Basically, how much the quantity you

demand can

STRETCH

Elastic Demand

• A change in the price causes a relatively large change in the quantity demanded• If beef gets too expensive, customers will

switch to chicken and the quantity demanded for beef will decrease.

• Demand is elastic if the calculation is greater than 1.

Inelastic Demand

• A change in price causes a relatively small change in the quantity demanded.

• Example: if the price of insulin goes up everywhere, people will diabetes will still buy the same amounts because they need it to survive.

• Demand is inelastic if the calculation is less than 1.

Unit Elastic

• A change in prices causes a proportional change in quantity demanded.• Example: If the price of an item goes up

10%, the quantity demand goes down 10%

• Demand is unit elastic if the calculation is exactly 1.

What determines Elasticity?

Are adequate substitutes available?

• If adequate substitutes are available then demand tends to be elastic.• Example: If the price of beef goes up, people can

substitute chicken, pork, fish, tofu. (causing a relatively large change in the quantity of beef demanded)

• If adequate substitutes are not available then demand tends to be inelastic• Example: If the price of insulin goes up, diabetics will

still buy the same amount of it (causing a relatively small change in the quantity demanded)

What proportion of your income do you spend on the good?

• If I spend a high proportion of my income then demand is elastic• Example: I spend 15% of my income on an expensive

hobby. If the price of the goods associated with that hobby goes up, I can just cut back on how much I do that hobby

• If I spend a low proportion of my income then my demand is inelastic• Example: if the price of pencils goes up it will not

affect my quantity demanded because I spend so little on these items anyways.

Can the Purchase be Delayed? (necessity or luxury)

• If the purchase can be delayed demand is elastic• Example buying plane tickets to go on a

vacation

• If the purchase cannot be delayed, demand is inelastic• Example: buying plane tickets to attend a

family member’s funeral.

Calculating Elasticity of Demand

• Why do we need to calculate elasticity of demand?

• Businesses use it to determine the need for price cuts

• If demand is elastic (greater than 1) then price cuts might help the business earn more.• Beef

• If demand is inelastic (less than 1) price cuts will not help the business earn more• Insulin

How to Calculate Demand Elasticity

• You will need to know 4 pieces of information1. Original quantity

2. New quantity

3. Original price

4. New price

• You will also most likely need a calculator to complete these problems

The StepsStep 1:

Original quantity — New quantity X 100 = percentage change in

Original quantity quantity demanded

 

 

Step 2:

Original price — New Price X 100 = Percentage change in

Original Price price

 

Step 3:

Percentage change in quantity demanded = ELASTICITY

Percentage change in price

IF the ELASTICITY number is greater than 1, demand is elastic.

IF the ELASTICITY number is less than 1, demand is inelastic.

Total Revenue Test

• Total Revenue is price times quantity demanded.

• The Total Revenue Test: One way to determine price elasticity of demand is to examine what happens to total revenue when the price for a product changes.

IF….Price Total Revenue

Elasticity of Demand

UP Down Elastic

Down Up Elastic

Up Up Inelastic

Down Down Inelastic

Up or Down Equal Unit Elastic

Let’s try some Examples!

Price rises from $5 to $6. Quantity demanded decreases from 15 to 10.• Old price x old quantity demanded = old total revenue

________x __________ = ___________

 • New price x new quantity demanded =new total revenue

________x __________ = ___________

 

Price goes _______and total revenue goes _____ so demand is __________

Example #2

Price falls from $10 to $8. Quantity demanded increases from 12 to 16.• Old price x old quantity demanded = old total revenue

________x __________ = ___________

 • New price x new quantity demanded =new total revenue

________x __________ = ___________

 

Price goes _______and total revenue goes _____ so demand is __________

FINALLY WE ARE DONE WITH DEMAND!