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Chapter 3
What is Demand?
Demand Preview
• Demand – the amount of an economic
product that people are willing and able to
buy at a given price.
• Economists want to know not only how
much will be demanded at the current price,
but what happens to demand if price
increases or decreases.
Demand Schedule
•
•
A demand schedule is a list of the quantity
demanded at various prices
Information for a demand schedule obtained by:
1. Past results from experience.
2. Results of competitors
3. Studying consumer opinions (surveys)
Demand Schedule
Example: Demand for CD’s at Galion High School
Quantity Demanded
Price
(monthly)
(dollars)
300
$5.00
250
$10.00
200
$15.00
150
$20.00
100
$25.00
50
$30.00
Demand Curve
• A demand curve is a graphic display of a demand
schedule.
The graph will look like this before data are entered.
• . Quantity Demanded
(monthly)
300
250
200
150
100
50
Price
(dollars)
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
• . Quantity Demanded
(monthly)
300
250
200
150
100
50
Price
(dollars)
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
• . Quantity Demanded
(monthly)
300
250
200
150
100
50
Price
(dollars)
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
Demand Curve
• Observations:
– The demand curve has a negative slope
– Higher prices cause students to buy fewer items
– Lower prices cause students to buy more items.
• Calculate total revenue (sales):
– If the price of CDs is $15, what are sales going to be?
$15 X 200 units = $3000 sales
– If 250 units are sold, what are sales going to be?
– 250 units X $10 = $2500 sales
Symbols Used In Graphs
Changes in Demand
• Change in Quantity Demanded
– Answers the question “How much will Q
change if we change P?”
• Change in the Level of Demand
– Answers the question “What happens when
consumers demand more or less at any given
price?”
Change in Quantity Demanded
Given:
• Current Level of Demand
• Current Price (P1 and Qd1)
Change in Quantity Demanded
Given:
• Current Level of Demand
• Current Price (P1 and Qd1)
***************************
What if P increases to P2?
Change in Quantity Demanded
Given:
• Current Level of Demand
• Current Price (P1 and Qd1)
***************************
What if P increases to P2?
• Qd will decrease to Qd2
Change in Quantity Demanded
Given:
• Current Level of Demand
• Current Price (P1 and Qd1)
***************************
What if P increases to P2?
• Qd will decrease to Qd2
What if P decreases to P3?
Change in Quantity Demanded
Given:
• Current Level of Demand
• Current Price (P1 and Qd1)
***************************
What if P increases to P2?
• Qd will decrease to Qd2
What if P decreases to P3?
• Qd will increase to Qd3
Change in Quantity Demanded
Given:
• Current Level of Demand
• Current Price (P1 and Qd1)
***************************
What if P increases to P2?
• Qd will decrease to Qd2
What if P decreases to P3?
• Qd will increase to Qd3
***************************
Conclusion:
• Price is inversely proportional
to Quantity Demanded
• P increases, Qd decreases
• P decreases, Qd increases
The Law of Demand
• The Law of Demand states that price works
inversely with quantity demanded.
• When price increases… quantity demanded
will always decrease.
• When price decreases… quantity demanded
will always increase.
Increase in Level of Demand
Given:
• Current Level of Demand (D)
• Demand curve shifts to D1
***************************
Increase in Level of Demand
Given:
• Current Level of Demand (D)
• Demand curve shifts to D1
***************************
At P1, Qd increases from Qd1 to
Qd2
Increase in Level of Demand
Given:
• Current Level of Demand (D)
• Demand curve shifts to D1
***************************
At P1, Qd increases from Qd1 to
Qd2
At P2, Qd increases from Qd3 to
Qd4
Increase in Level of Demand
Given:
• Current Level of Demand (D)
• Demand curve shifts to D1
***************************
At P1, Qd increases from Qd1 to
Qd2
At P2, Qd increases from Qd3 to
Qd4
***************************
Conclusion:
• When the level of demand
increases, Quantity Demanded
will increases at any price.
Decrease in Level of Demand
Given:
• Current Level of Demand
(D)
• Demand curve shifts to D2
*************************
Decrease in Level of Demand
Given:
• Current Level of Demand
(D)
• Demand curve shifts to D2
*************************
At P1, Qd decreases from Qd1
to Qd2
Decrease in Level of Demand
Given:
• Current Level of Demand
(D)
• Demand curve shifts to D2
*************************
At P1, Qd decreases from Qd1
to Qd2
At P2, Qd decreases from Qd3
to Qd4
*************************
.
Decrease in Level of Demand
Given:
• Current Level of Demand
(D)
• Demand curve shifts to D2
*************************
At P1, Qd decreases from Qd1
to Qd2
At P2, Qd decreases from Qd3
to Qd4
*************************
When the level of demand
decreases, Quantity
Demanded will decrease at
any price.
Reasons for Shift in Level of
Demand
1. Cravings for seasonal products
•
•
In season, level of demand will increase
(Consumers will buy more lawn mowers at
any price in the spring)
Out of season, level of demand will decrease.
(Consumers will buy less snow blowers at
any price in the spring)
Reasons for Shift in Level of
Demand
2. Change in disposable income. (Spending
money)
•
•
When people have more spending money,
they will spend more on products even if
prices increase.
When people have less spending money, they
will spend less on products even if prices
decrease.
Reasons for Shift in Level of
Demand
3. Change is price of a complement.
A complement is something that can be used with
your product. A complement of gasoline is
automobiles.
–
–
When the price of automobiles goes up, people will buy
less gasoline. The level of demand for gasoline will
decrease. People will buy less gasoline at any price
When the price of automobiles goes down, people will
buy more gasoline. The level of demand for gasoline
will increase. People will buy more gasoline at any
price.
Reasons for Shift in Level of
Demand
4. Change in the price of a substitute.
A substitute is something that can be used instead
of your product. A substitute of beef is pork.
• When the price of pork increases, people will
buy more beef. The level of demand for beef
will increase.
• When the price of pork decreases, people will
substitute pork for beef. The level of demand
for beef will decrease.
Reasons for Shift in Level of
Demand
5. Change in tastes, styles, or preferences
•
•
When a certain style of jeans becomes
popular, people will buy more at any price
and the level of demand will increase.
When a type of shoe is no longer fashionable,
people will buy less at any price and the level
of demand will decrease.
Reasons for Shift in Level of
Demand
6. Change in Expectations
•
•
A predicted shortage would cause an increase in
the level of demand.
A news report predicting a slowdown in the
economy would cause a decrease in the level of
demand.
OVERHEAD – SHIFTS IN LEVEL OF DEMAND
Things That Confirm the Law of
Demand
• Income Effect
– If income remains constant and the price of
your product decreases, consumers will buy
more of the product.
• Substitution Effect
– If the price of a substitute remains constant, and
the price of your product decreases, people will
buy more of your product.
Things That Confirm the Law of
Demand
• Principal of Diminishing Marginal Utility
– Marginal = extra from adding one unit
– Utility = usefulness
– The extra usefulness or satisfaction a person
gets from acquiring an additional unit of the
product will decrease with each unit added.
– As usefulness decreases, if price remains
constant the demand for the product will
decrease.
Example of Law of Diminishing
Marginal Utility
Given:
The price of water in the desert is
$60 per cup (8 oz.)
****************************
A person might pay $100 for the
first cup—very thirsty!
Example of Law of Diminishing
Marginal Utility
Given:
The price of water in the desert is
$60 per cup (8 oz.)
****************************
A person might pay $100 for the
first cup—very thirsty!
Being very thirsty, they might pay
$80 for the 2nd , $75 for the 3rd ,
$70 for the fourth, and $65 for
the 5th, $60 for the 6th, $55 for
the 7th , and $50 for the 8th.
Example of Law of Diminishing
Marginal Utility
Given:
The price of water in the desert is
$60 per cup (8 oz.)
****************************
A person might pay $100 for the
first cup—very thirsty!
Being very thirsty, they might pay
$80 for the 2nd , $75 for the 3rd ,
$70 for the fourth, and $65 for
the 5th, $60 for the 6th, $55 for
the 7th , and $50 for the 8th.
Explanation of Law of
Diminishing Marginal Utility
• This proves the Law of Demand because it
demonstrates that the only way to make a
person buy more of a product that they have
had enough of is to decrease the price.
• The oasis could sell two additional cups of
water if they decreased their price to $50
per cup!
Test 3
•
•
•
•
What is demand?
What is a demand schedule?
What is a demand curve?
Reproduce graphs complete will explanation at the
left of the graph demonstrating:
– Change in quantity demanded
– Increase in level of demand
– Decrease in level of demand
• Reasons for a shift in the level of demand.
• Things that confirm the Law of Demand