Download Chapter 20.1

Chapter 20.1
What is Demand?
An Introduction to Demand



In the U.S., the forces of supply and demand work
together to set prices.
Demand is the desire, willingness and ability to buy
a good or service. For demand to exist, a consumer
must want a good or service be willing to buy it and
have the resources to buy it.
A demand schedule is a table that lists the various
quantities of a product or service that someone is
willing to buy over a range of possible prices.
continued


A demand schedule can be shown as points on a
graph. The graph lists prices on the vertical axis
and quantities on the horizontal axis. Each point on
the graph shows how many units of the product or
service an individual will buy at a particular price.
The demand curve is the line that connects these
points.
The demand curve slopes downward. This shows
that people are normally willing to buy less of a
product at a high price and more at a low price.
According to the law of demand, quantity
demanded and price move in opposite directions.
Individual v. Market Demand


Market demand is the total demand of all
consumers for a product or service. Market
demand can also be shown as a demand
schedule and demand curve.
To illustrate, you would want to open a bike
repair shop in an area with many bike riders
and few repair shops. To measure demand
in the area, you could check prices at other
similar shops and poll consumers about their
reactions to the prices.
continued

We buy products for their utility – the
pleasure, usefulness or satisfaction they give
us. The utility of a good or service is different
for different people. A particular product may
have no utility for some people.
continued

Say you eat a slice of pizza. Because you
are hungry when you eat the first slice, this
slice give you the most utility or satisfaction.
As you grow less hungry, each additional
slice you eat provides less marginal utility or
less additional satisfaction. The principle of
diminishing marginal utility says that our
additional satisfaction tends to go down as
we consume more and more units.
continued


To make a buying decision, we consider whether the
satisfaction we expect to gain is worth the money we
must give up. If the extra benefits (marginal utility)
are greater than the marginal cost (extra money
given up), we make the purchase. If not, we keep
the money instead.
Because marginal utility diminishes, we would be
willing to pay less for the second item than for the
first. Likewise, we would be willing to pay even less
for the third item. This helps to explain the
downward sloping demand curve.