Download Quantity demanded

Chapter 3
1
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Describe consumer behavior.
Separate the difference between a change in
demand and a change in quantity demanded.
Describe firm behavior.
Separate the difference between a change in
supply and a change in quantity supplied.
Investigate how a market establishes an
equilibrium price.
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There is an inverse relationship between the
price of a good and the quantity of it buyers
are willing and able to purchase
◦ When the price rises, quantity demanded falls
◦ When the price falls, quantity demanded rises
◦ Ceteris paribus!
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Pizza Demand Schedule
Price
Quantity
Demanded
$20
10
16
60
12
110
8
160
4
210
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Quantity demanded –
the number that
people are willing and
able to buy at each
price
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Pizza Demand
Schedule
Pizza Demand Curve
Quantity
Demanded
$20
10
25
16
60
20
12
110
8
160
4
210
Price Pizza
Price
15
10
5
Demand
0
10
60
110
160
210
Quantity Pizza
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How much do consumers value the good?
Max amount willing to buy at any given price
Consumers value additional units less
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Consumer Surplus – the difference between
the maximum price consumers are willing to
pay and the price they actually pay.
Represents the net benefit of buying the
good.
Example: You’re willing to pay $25 for a
shirt. You buy it for $15. Your consumer
surplus is $25 - $15 = $10.
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Price
On a graph,
consumer surplus
is the area below
the demand curve
and above the price
P1
Demand
Q1
Quantity
8
Price
P1
Demand
Marginal value –
height of demand
curve at each
quantity
Total value – the
combined value of
all units purchased
Q1
Quantity
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Lower price  more consumer surplus
Higher price  less consumer surplus
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Consume good until
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◦ Price = Marginal Value
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Price reflects marginal value, not total value
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Products that serve similar purposes
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Elastic and Inelastic Demand
• Elastic demand
Red Nike Running
Shoes
Price
– Many substitutes are
available
– Quantity demanded is
quite responsive to a
change in price
– The demand curve is
relatively flat (but still
downward sloping)
Demand
Quantity
12
Elastic and Inelastic Demand
• Inelastic demand
Econ Text
Price
– Few substitutes are
available
– Quantity demanded is
not very responsive to a
change in price
– The demand curve is
relatively steep (but still
downward sloping)
Demand
Quantity
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Increase in Demand
Price
Price
Increase in Quantity
Demanded
D1
Q1
Q2
Quantity
D2
Quantity
14
Decrease in
Demand
Price
Price
Decrease in Quantity
Demanded
D2
Q2
Q1
Quantity
D1
Quantity
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Change in Quantity Demanded: caused by a
change in the price of the good.
Change in Demand: caused by changes in
factors other than a good’s price that
influence consumer decisions
◦
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◦
◦
◦
Consumer income
Number of consumers
Price of related goods
Expectations
Demographics
Tastes and preferences
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For most goods,
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◦
◦
An increase in income leads to an increase in
demand for the good
A decrease in income leads to a decrease in
demand for the good

When the number of consumers
◦ increases, demand increases
◦ falls, demand decreases
a.
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Substitutes -- goods that perform similar
functions or fulfill similar needs
When the price of a substitute changes, the
demand for the other good is impacted
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An increase in the price of one substitute
good leads to an increase in the demand for
the other
An decrease in the price of one substitute
good leads to an decrease in the demand
for the other
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Prices of substitutes move in the same direction
b.
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Complements -- products consumed jointly
When the price of a complement changes,
the demand for the other good is impacted
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An increase in the price of one complement
good leads to an decrease in the demand
for the other
An decrease in the price of one complement
good leads to an increase in the demand for
the other
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Prices of complements move in opposite directions
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Expectations about the future can shift
demand curves in the present
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Changes in sex, race, or age of population
change demand for certain goods
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Tastes and preferences change due to
changes in trends, information, and people