Download Under Standing Demand!

Understanding Demand!
Economics
Economic Market
• Market: Any place where people come
together to buy and sell goods or
services
• An economic market has two sides:
– The buying side is referred to as demand
– The selling side is referred to as supply
P / Q / Δ / Qd
•
•
•
•
P = price
Q = quantity
Δ = change
Qd = quantity demanded
What is Demand?
• Demand: The willingness and ability
of buyers to purchase different
quantities of a good at different prices
during a specific time period
– Willingness refers to the buyer’s want or
desire to buy the good
– Ability refers to the buyer having the
money to purchase the good
What is Demand?
• Example
• John doesn’t have $450 for a new Iphone. If he did have the money, he
would buy it. John has the willingness to
buy the I - phone, but does not have the
– ability.
Law of Demand
• Law of Demand: a law stating that as the
price of a good increases, the quantity
demanded of the good decreases, and that
as the price of a good decreases, the quantity
of the good increases (inverse relationship).
• If P↑ then Q d ↓
• If P↓ then Q d ↑
Law of Demand
• When the price of a good goes up,
people buy less of it, other things being
equal. When the price of a good goes
down people buy more of it, other things
being equal.
Law of Demand
• Example:
• If the price of a ring tone decreases,
quantity demanded will __________
– increase
• If the price for a ring tone increase,
quantity demanded will __________
– decrease
Quantity Demanded
• Quantity Demanded:
The number of specific
units of a good
purchased at a specific
price
• Example
– Angie buys two scoops of
ice cream for $3 at her
school lunch. The two
scoops of ice cream is
the quantity demanded at
$3
Demand Schedule
• The numerical
representation of the
law of Demand
– Notice as the price
goes down, the
quantity demanded
goes
– Up
– And vice versa
Price
5
4
3
2
Quantity
Demanded
10
17
36
38
1
53
Price and Quantity
Demanded
• Why does quantity demanded rise as price falls?
– The Law of Diminishing Marginal Utility!
• A law stating that as a person consumes additional
units of a good, eventually the utility (satisfaction)
gained from each additional unit of the good
decreases
– This is why demand is a curve more than a
straight line
• Example
– You enjoy your first Big Mac more than your second, and you
enjoy your second more than your third
Demand Curve
• The graphical
representation of the
law of demand
• Notice:
– Price is always on
the vertical axis
– Quantity demanded
is on the horizontal
axis
Demand Curve Shift
• As demand
increases, the
curve shifts right
• As demand
decreases, the
curve shifts left
What Causes Change in
Demand? (demand curve shift)
INEPT
• Income
• Number of Buyers
• Expectations of future prices
• Prices of Related Goods
• Tastes and Preferences
What Causes Change in
Demand? (demand curve shift)
• Income: As income goes up or down,
people may buy more or less of a
product
– Income going up or down, does not mean
the demand will change. It depends on the
good.
– Ex: Food vs. a New Car; House vs. a
Vacation
Types of Goods
• Normal good:
– A good for which the demand rises as income
rises and demand falls as income falls
• Inferior good:
– A good for which the demand falls as income rises
and demand rises as income falls
• Neutral good:
– A good for which the demand remains unchanged
as income rises or falls
What Causes the Demand
Curve to Shift?
• Number of Buyers: An increase in the
number of buyers in a market area
results in higher demand
– A decrease results in lower demand
– How do buyers increase and decrease?
What Causes the Demand
Curve to Shift?
• Expectations of future Price: If buyers
think the price of a good will increase or
decrease in the future, they will impact
demand
– Ex: Gas prices, Play Station 3, prom
dresses, tickets
Will these cost more or less in
the future?
What Cause the Demand
Curve to Shift?
• Prices of related goods:
• Complement: a good that is consumed
jointly with another good. The price of one
and the demand for the other move in
opposite directions (inverse relationship)
• Substitutes: a similar good. The price of
one good and the demand for the other
move in the same direction (direct
relationship)
Complements and
Substitutes
What Causes the Demand
Curve to Shift?
• Tastes and Preferences: People’s
preferences affect how much of a good
they buy.
– A change in favor of a good moves the
curve to the right
– A change NOT in favor of the good moves
the curve to the left
Change in Demand vs.
Change in Quantity Demanded
D2
D1
• CHANGE IN DEMAND
• A change in demand
refers to a shift in the
demand curve.
• This can be brought on
by any of the 5 factors
Change in Demand vs.
Change in Quantity Demanded
D1
A
B
• CHANGE IN
QUANTITY
DEMANDED
• A change in quantity
demanded refers to a
movement along a
given demand curve.
• This is only brought on
by a change in price
What Causes Change in
Quantity Demanded?
PRICE!
Demand Lesson
• Video: Demand
• Video lesson: Law of Demand