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DEMAND
What is demand?
• Demand effects
everything from ‘A’
• Apples
What is demand?
• TO Z
• Zebras
• Demand is one side of the wellknown economic “equation” of
supply and demand.
• An economic phenomenon
• Demand does not reflect what
households want or need.
• Demand reflects only what
households are WILLING and ABLE
to pay for.
DEMAND
REFERS TO THE QUANTITES
OF A GOOD THAT CONSUMERS
ARE WILLLING AND ABLE TO
PURCHASE AT VARIOUS
PRICES DURING A GIVEN
PERIOD OF TIME
LAW of DEMAND
HUMAN
NATURE
LAW of DEMAND
• As the prices of a good rises,
the quantity demanded by
consumers fall
• As the price of a good
decreases the quantity
demanded rises
LAW of DEMAND
Demand
• There are THREE economic concepts that
explain the Law of Demand and these concepts
account for the inverse relationship that changes
in the price of goods/services have on the
quantity demanded:
• Income/ Purchasing Power
Effect
• Substitution Effect
• Diminishing Marginal Utility
Income/Purchasing Power Effect
• Amount of money a person has to spend on
goods/services called purchasing power.
• It is not a change in a person’s income but a change in
purchasing power (real income) because of a change in
the good/service.
Pr.
Pur.Pwr.
QD
Pr.
Pur.Pwr.
QD
Income/Purchasing Power Effect
Either a lot
of $$$$$$$
OR
No $$$$$$$$$$$
Substitution Effect
• To substitute a lower priced product/service (generic) for a
normal product/service that is more expensive.
Price A (NORMAL)
If there is a substitute than the quantity
demanded of that normal good will decrease.
QD
What happens if there is not a substitute?
Substitution Effect
Diminishing Marginal Utility
• What is UTILITY?
• The usefulness of a good/service or the satisfaction one
gets from that good/service.
D.M.U
.
• As the price of a good/service decreases, the quantity
demanded increases, but for each successive decrease in
price, the quantity demanded will increase but at a smaller
rate.
• You will get to a point where the quantity demanded will
reach zero- at that point you have no more utility for that
good/service.
Diminishing Marginal Utility
A Change in Demand
Review- Change in the Quantity of Demand
A CHANGE IN PRICE!
Income Effect
Substitution Effect Diminishing Marginal
Utility
*Just a SNAPSHOT- ONLY PRICE MATTERS- Ceteris Paribus
QUANTITY DEMANDED
• The amount
consumed/purchased of a
G/S at a specific price at
a given time
QUANTITY DEMANDED
CHANGE IN PRICE
IS MOVEMENT
ALONG THE
CURVE
DEMAND
DEMAND
Demand schedule
This is a numerical representation of the
inverse
relationship between specific
relative prices and quantity demanded.
Demand curve
This is a graphic representation of the
demand schedule. A negatively sloped
line showing the inverse relationship
between relative price and quantity
demanded.
DEMAND
CHANGE IN PRICE IS
MOVEMENT ALONG
THE CURVE
Determinants of Demand
SHIFT HAPPENS
Determinants of Demand
A SHIFT IN A DEMAND CURVE
MEANS THAT AT EVERY PRICE,
CONSUMERS BUY A DIFFERENT
QUANTITY THEN BEFORE
Shifts in Demand
The Determinants of Demand
Price
Increase – Right Shift
Decrease –Left Shift
D3
D1
D2
Q/Units
A Change in Demand
• A change in the quantity that
people plan to buy when any
influence other than the price of
the good changes.
• There is a new demand schedule
and a new demand curve.
• This shift in the demand curve
causes an overall change in the
level (quantity) of demand at each
and every price.
Determinants of Demand
FACTORS THAT SHIFT THE DEMAND CURVE
• Change in consumer tastes and preferences
• Change in the number of buyers/population
• Change in consumer incomes (↑ or ↓)
• Change in the prices of complementary
and substitute goods—Relative Goods
• Change in consumer expectations (future)
DEMAND
• Taste and preferences of
consumers
• Related goods prices
• (complements and substitutes)
• Income of buyers*
• Buyers
• (number of /population:
increase/decrease)
• Expectations for the future
Understanding Shifts of the
Demand Curve
•
Increase = right, Decrease = left
•
M.E.R.I.T. shifts demand
•
Market size (number of consumers)
•
Expectations
•
Related prices (complements, substitutes)
•
Income (normal, inferior)
•
Tastes
*Types of Goods
• Inferior
• Normal
• Superior
*Types of Goods
• Inferior
–tap water
• Normal
–bottled water
• Superior –sparkling water
A SHIFT IN A DEMAND
CURVE MEANS THAT AT
EVERY PRICE,
CONSUMERS BUY A
DIFFERENT QUANTITY
THEN BEFORE
Change in Quantity Demand vs. Change
in Demand
Change in Quantity Demand vs. Change
in Demand
 When you draw a shift of the
demand, be careful to draw the
arrows in the horizontal
direction.
 Follow the text by always
describing shifts of demand and
supply curves as “rightward” or
“leftward.” Do not say that the
curves shift “up” or “down” or
“inward” or “outward.”
CHANGE IN PRICE IS
MOVEMENT ALONG THE
CURVE
A SHIFT IN A DEMAND CURVE
MEANS THAT AT EVERY PRICE,
CONSUMERS BUY A DIFFERENT
QUANTITY THEN BEFORE
DEMAND MOVEMENT and
SHIFT