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Demand
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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
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Marginal Benefit is reflected by what consumer is
willing to pay. Marginal Cost is price of item.
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Demand for Adam Humphrey’s Visa
Service (based on individual’s willingness to pay)
Depends on,
 Price of Service
 Individual’s Income
 Price Associated with Doing it at Burger King
 How much does the person really want to go
to China or how big a hassle is it to come
back.
 Number of Individuals going to Chinese
Consulate for visa.
Demand for Adam Humphrey’s Visa Service
Market Demand for Adam
Humphrey’s Visa Service
Obtained by summing all individual demands.
Depends on,
 All factors that affect individuals’ demands
(price of service, income, price of related
goods, tastes/preferences, expectation of
future prices, etc.)
 Number of Individuals (population)
Individuals Can Demand Multiple Units
Example of Change in Demand
due to Increase in Income
Normal Good
At every price people buy
more so demand increases
-shifts to right.
D1
Examples:
1. Adam Humphrey’s Service
2. i phones
3. Lego Robotics
4. Shrimp
5. Yachts
6. Red Haven Restaurant
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Example of Change in Demand
due to Increase in Income
Inferior Good
At every price people buy less
so demand decreases
-shifts to left.
Examples:
1. Generic Diapers
2. Bologna
3. Canned Beans
4. Ford Fiesta
5. Bus tickets
D1
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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:
Adam Humphrey’s Service and Burger
King’s Internet Café
Chicken Breasts and Chicken Wings
Diet Coke and Diet Pepsi
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Change in demand due to change in
the price of a Substitute
Price of a substitute good P
INCREASES Demand Increases
Shifts Right
Example:
Price of Diet Pepsi
increases, Demand for
Diet Coke increases
D1
D0
Q
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Change in demand due to change in
the price of a Substitute
Price of a substitute good P
DECREASES Demand Decreases
Shifts Left
Example:
Price of Diet Pepsi
decreases, Demand for
Diet Coke decreases
D1
D0
Q
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Change in demand due to change in
the price of a Substitute
Price of a substitute good P
INCREASES Demand Increases
Shifts Right
Example:
Price of Diet Pepsi
increases, Demand for
Diet Coke increases
D1
D0
Q
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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:
Adam Humphrey’s Service and Airfare
to China
Hardware and Software
Gasoline and GMC Yukons
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Change in demand due to change in
the price of a Complement
Price of a complementaryP
good INCREASES Demand Decreases
Shifts Left
Example:
Price of Hardware
increases, Demand for
Software decreases
D1
D0
Q
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Change in demand due to change in
the price of a Complement
Price of a complementaryP
good DECREASES Demand Increases
Shifts Left
Example:
Price of Hardware
decreases, Demand for
Software increases
D1
D0
Q
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Demand = Willingness to Pay
Consumer Surplus (The value
consumers get from
a good but do not
have to pay for.)
P=35
What does the demand curve look like?
Which demand below is for the more “price sensitive” product?
P
P
D1
D2
Q
Q
How “price sensitive” are consumers to:
Salt
Cigarettes
Gasoline
Diet Coke
i Phones
Chipotle on Grand River
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What determines price sensitivity/ price elasticity?
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Number of substitutes
The more substitutes or the closer the substitutes, the…
Ex. Diet Coke
more elastic
Time interval
The longer time interval the…
Ex. Gasoline
more elastic
Share of budget
The larger share of the budget the …
more elastic
Ex. Salt
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