Download Demand

Understanding Demand
The Circular Flow Diagram
•Shows the relationship
between what people
want to buy and what
firms are willing to sell
Product
Market
Firms
To Produce Compact
Discs -- Firms Want
To Buy (Demand)
Labor and Households
Want to Sell (Supply) it.
For Instance, Compact
Discs -- Households
Want To Buy (Demand)
Them and Firms Want
to Sell (Supply)Them.
Households
Resource
Market
What is Demand?
As we discussed earlier - there is a limited
amount of goods out there. So how do we
decide what we want? The concept of
demand captures this issue. Demand is
made up of two elements:
–Desire for Goods and Services
–Means to purchase those Goods
and Services
Law of Demand
• Law of Demand - the price of a product (or
service) is inversely related to the quantity
demanded, ceteris paribus.
Ceteris Paribus
• Latin for “All other things held constant”
• The demand schedule is only taking into
account the changes in price.
• It does not take into effect any advertising
or the hundreds of other factors that could
account for a change in demand.
Demand Schedule and Curve
• A table or diagram showing the relationship
between the price of a good and the quantity
demanded per period of time, ceteris paribus.
Demand Schedule
P ($)
Qd
$20
5
$15
7
$10
15
Demand Curve
P($)
20
A
B
15
C
10
D
5
0
5
10
15
Qd per month
Market Demand Schedule/Curve
• A table or diagram showing the relationship
between the price of a good and the total
quantity demanded by all consumers.
Market Demand Schedule
5
Mary’s
Qd
3
John’s
Qd
12
Tom’s
Qd
7
Market
Qd
22
10
2
8
5
15
15
1
3
4
8
P($)