Download Law of demand

Warm-up
A student opens a school lunch account with
an opening balance of $50. Lunch costs
$2 per day, and the student charges lunch
to his account each day.
• Write an equation representing the
balance of the account in terms of the
number of lunches charged.
1. What is demand?
2. What is the law of demand?
3. What is the difference between demand and quantity
demanded?
4. What is the difference between individual and market demand?
5. What is a demand curve? How is it made?
What is demand?
• Demand is the behavior of buyers (consumers)
– Consumers, households in a product market
• Demand is the various quantities of a good (or
service) the consumer is willing and able to buy
at all prices during a time period, ceteris paribus
– Willing: wants to buy a good
– Able: can afford the good
– CP: all things other than price (as an affect) are
constant/unchanging
Quantity demanded (Q)
• Quantity demanded is the amount of g/s
consumers are willing & able to buy at a specific
price.
• What is the relationship between quantity
demanded and price in a market?
– As price increases, quantity demanded decreases
• We show this relationship between Q and P
using a demand curve.
Representing quantities demanded
• A demand schedule, or table listing
quantities demanded at different prices
• Information in the schedule can be plotted
as a graph, called a demand curve.
– Quantity (Q) on x-axis
– Price (P) on y-axis
• Schedule and curve only tells us the Q
prepared to buy at a certain P
SCHEDULE
CURVE
The law of demand
• Law of demand: there is a negative causal
relationship between quantity demanded and
price of a good over time, ceteris paribus
• In other words, P and Q change in opposite
directions
– As one falls, the other increases (negative or
indirect relationship)
So what’s up with the curve?
• It’s not really “curvy” in most graphs you’ll see.
This is because it does not account for elasticity
(we’ll talk more about this)
• The downward sloping demand curve is set in
the principle of decreasing marginal benefit
(utility): since marginal benefit falls as quantity
consumed increases, the consumer will be
induced to buy each extra unit as price falls
– This makes sense to us: When a g/s goes on sale,
consumers buy (demand) more because the price is
reduced.
Why do P and Q move in opposite
directions?
• The law of diminishing utility
“thinking at the margin” principle tells us consumers choose not
whether to buy, but how much to buy. This raises the question of
utility: satisfaction in consuming one more item
• The income effect
Scarcity of income means that if the price of a g/s increases, people
won’t be able to buy the same quantity as they did @ original price
• The substitution effect
substitute goods are a type of good that can satisfy the same want
as an “original” good, but often at a lower cost (competition)
– At some point, people will substitute the cheaper good due to
price
– Ex: “Dr. Thunder” rather than Dr. Pepper
Individual Demand vs.
Market Demand
• Market demand shows the total quantities
in the market for the good consumers are
willing and able to buy at all prices
– during a particular period of time, ceteris
paribus
• Market demand: the sum of all individual
demands for a good
– also the sum of consumers’ marginal benefits