Download Demand Notes

Demand Notes
• Quantity Demanded- the quantity of a
good or service consumers are willing and
able to purchase at a specific price at a
given point in time.
• Demand- is the relationship between the
quantities of a good or service consumers
are willing and able to purchase and the
various prices the products are offered
for sale at a given point in time.
• True or False
– Demand is the entire relationship
between all of the quantities demanded
of a product and the various possible
prices they are offered for sale at a
given time.
– The quantity demanded of a product is
only part of the demand relationship. It
represents a specific quantity at a
particular price, not the entire
relationship
Demand Schedule
• A demand schedule shows the relationship
between the quantities of a good
consumers are willing and able to
purchase and the various prices for which
it is offered for sale in a tabular format
Demand Curve
• A demand curve is a graphic
representation of the relationship
between the quantities of a good or
service consumers are willing and able to
purchase and the prices the products are
offered for sale.
Assumptions of a Demand Curve
• All characteristics of Capitalism/
competitive markets
• Specific time period
• Ceteris paribus (all other things remain the
same)
Demand Schedule
Price (P)
Quantity (Q)
$1
5
$2
4
$3
3
$4
2
$5
1
Lets Graph the demand schedule
Price
$5
$4
$3
$2
$1
Quantity
1
2
3
4
5
Demand Curve
Price
$5
$4
$3
$2
$1
Quantity
1
2
3
4
5
• The demand curve is downward sloping
from left to right.
• The demand curve has this shape
because it reflects a(n) ____________
relationship between prices and quantities
demanded
Relationships
• The demand curve is downward sloping
from left to right.
• The demand curve has this shape
because it reflects an inverse relationship
between prices and quantities demanded
Relationships
• When two related variables move in the
same direction, the express a direct
relationship
Price
$5
$4
As price goes
up, quantity
goes up!
$3
$2
$1
1
2
3
4
5
Quantity
Relationships
• When two related variables move in
opposite directions, they express an
inverse relationship
Price
$5
$4
As price goes
down, quantity
goes up!
$3
$2
$1
1
2
3
4
5
Quantity
Price
$5
_______ P
$4
_______ QD
$3
$2
$1
Quantity
1
2
3
4
5
Price
$5
_______ P
$4
_______ QD
$3
$2
$1
Quantity
1
2
3
4
5
• In the graphs above, illustrates the effect
of the change in price on the change in
quantity demanded.
• The inverse relationship between the
price of a product and the quantity
demanded is called the law of demand.
Reasons for inverse relationship
• Income effect:
– An increase in the price of a product reduces
the purchasing power of a consumer’s
income; therefore, the consumer buys less of
the product
– A decrease in the price of a product
increases the purchasing power of a
consumer’s income; therefore the consumer
buys more of the product
Reasons for inverse relationship
• Substitution Effect
– Rational consumers have a tendency to
substitute relatively low priced products for
relatively high priced products; therefore, an
increase in the price of a product will cause
consumers to buy less of the product for
which they can substitute lower-priced
products.
Reasons for inverse relationship
• Diminishing marginal utility
– Each additional unit of a product that is
purchased provides less and less satisfying
power to the consumer; therefore, to
encourage consumers to purchase quantities
of a product, the price must be decreased.
• A change in the price of a good or service
causes a change in quantity demanded.
This can be illustrated by a movement
along the demand curve up and down
Price
$5
We move from one
point (i.e. from $4
to$2) to another
$4
$3
$2
$1
1
2
3
4
5
Quantit
y
• Therefore, a change in demand (total
relationship) is caused by a change in
some other factor than price of the good
itself. The NON-PRICE factor or
determinant of demand changes all the
quantities at the various prices, thus
changing the entire demand relationship
• A change in demand is illustrated by a
shift in the demand curve to the left for a
decrease and to the right for an increase
in demand
Price
$5
$4
$3
$2
$1
1
2
3
4
5
Quantity
Price
$5
$4
$3
$2
$1
Quantity
1
2
3
4
5
Price
$5
$4
$3
$2
$1
Quantity
1
2
3
4
5
Price
$5
$4
$3
$2
$1
Quantity
1
2
3
4
5
Price
$5
$4
$3
$2
$1
Quantity
1
2
3
4
5
NONPRICE DETERMINANTS OF DEMAND
1. Changes in tastes and preferences
2. Changes in people’s income
Normal goods- As income goes up, so does demand
Inferior goods- As income goes up, demand goes down
Neutral goods- no effect
3. Change in the prices of related goods
Substitute goods- Is a direct relationship, As price of the normal good goes
up, demand for the substitute goes up
Complementary goods- Is an inverse relationship. As price of
normal good goes up (like peanut butter), the demand for complementary
good (like jelly) goes down
NON PRICE DETERMINANTS OF DEMAND
cont’d
4. Changes in the number of buyers (market size)
5. Changes in consumer expectations
– If you expect gas prices to go down tomorrow, what will happen to
demand for gas today?
– If you expect gas prices to go up tomorrow, what will happen to demand
for gas today?