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Demand
Chapter 2
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Demand analysis - intuition
Marginal Cost/Marginal Benefit analysis of
consumers
If Marginal Benefit > Marginal Cost, buy it
If Marginal Benefit < Marginal Cost, don’t buy it

Marginal Benefit is reflected by what consumer is
willing to pay. Marginal Cost is price of item.
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Individual’s Demand for Gasoline
(based on individual’s willingness to pay)
Depends on,
 Individual’s Income
 Price of Gasoline
 Prices of Related Goods (automobiles,
bus ticket, etc.)
 Individual’s Tastes/Preferences
 Individual’s expectation of future prices
3
Market Demand for Gasoline
Obtained by summing all individual
demands.
Depends on,
 All factors that affect individuals’ demands
 Number of Individuals (population)
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Graphing Demand
•
•
The demand schedule is a table that shows
the relationship between the price of the good
and the quantity demanded - fixing all the
other factors that affect quantity demanded.
The demand curve is the line relating price to
quantity demanded - fixing all the other factors
that affect quantity demanded.
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Graphing Demand
Schedule:
Price
10
9
8
7
6
5
4
3
2
1
0
Quantity
Demanded
0
1
2
3
4
5
6
7
8
9
10
Gasoline Market
10
9
8
7
6
5
4
3
2
1
0
D
0
1
2
3
4
5
6
7
8
9 10
Q=Quantity of Gas
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Law of Demand

Is the relationship between price and
quantity demanded positive or negative?
Negative (Price and quantity demand
move in opposite directions)

Law of demand
More of a good will be demanded, the
lower its price.
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Change in quantity demanded
results from a change in price, all else
equal
 shown as a movement along the demand
curve

8
Change in demand
results from a change in a factor other
than price
 shown as a shift of the entire demand
curve

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Notation
D=Demand
 QD=Quantity Demanded

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Example of Change in Demand
due to income change




Income Increases
At every price, do people
want to buy more or less?
For Gasoline, More!
Demand increases
Shifts right
Gasoline Market
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Price/Gallon of Gas = P

10
8
6
D1
4
2
D0
0
0
1
2
3
4
5
6
7
8
9 10
Quantity of Gas = Q
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Normal Good
A good for which demand increases when
income increases
 Examples:
Premium Beers and wine
Disneyland
Gasoline
Lego Robotic
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Income Increases for an Inferior Good
Inferior goods are goods where
demand decreases when income
increases.
 Examples:
Pabst Blue Ribbon Beer
Certain Products at Wal-Mart
Generic Diapers
Yugos (perhaps)
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Income Increases for an Inferior Good
Income
Increases
 At every price,
do people want
to buy more or
less?
 Less!
 Demand
decreases
 Shifts left

P
D1
D0
Q
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Change in demand due to change in
the price of a related good
 Substitutes
Two goods that satisfy similar needs
or desires
 Examples:
Diet Pepsi and Diet Coke
Strawberries and Raspberries
Gasoline and Manual Lawn Mowers
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Change in demand due to change in the price
of a related good: Substitutes



Price of a
substitute good
decreases
Demand
Decreases
Shifts Left
P
D1
D0
Q
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Change in demand due to change in the price
of a related good: Substitutes

What happens if the price of a substitute
increases?
Demand Increases/Shifts Right
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Change in demand due to change in
the price of a related good:

Complements
Two goods that are used jointly in
consumption.

Examples:
Tires and Gasoline
Tires and Automobiles
Beer and Pizza
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Change in demand due to change in the price
of a related good: Complements



Price of a
complementary
good decreases
Demand
Increases
Shifts right
P
D1
D0
Q
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Change in demand due to change in the price
of a related good: Complements

What happens if the price of a complement
increases?
Demand decreases/Shifts left
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Change in demand due to...
Tastes:
 Positive Change


demand increases
 shifts curve right
 Negative
Change

demand decreases
 shifts curve left
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Change in demand due to...
Population...
 Increase


demand increases
 shifts curve right
 Decrease

demand decreases
 shifts curve left
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Change in demand due to...
Expected:
 Price Increase


demand increases
 shifts curve right
 Price
Decrease

demand decreases
 shifts curve left
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Change in demand
results from a change in a factor other
than price
 shown as a shift of the entire demand
curve
 change in anything other than price

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Demand = Willingness to Pay
Gasoline Market
10
9
8
7
P= 6
5
4
3
2
1
0
Consumer Surplus
(The value
consumers get from a
good but do not have
to pay for.)
D
0
1
2
3
4
5
6
7
8
9 10
Q=Quantity of Gas
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Demand Function for Good X

QDx = f(Px, PY, M, H1 , H2, …)
where,
Px is the price of good X,
PY is the price of good Y,
M is income,
H1 is size of population,
H2 is consumers’ expectations,…

On the prior graph for gasoline, QDx = 10 - Px
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