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WhatisDemand?• Demand–describesthevariousamountsofproductthatsomeoneiswillingandabletobuyoverarangeofpossiblepricesatonepointin=me• Businessestrytoinfluencedemandwithadver=sing.
• Microeconomics–branchofeconomictheorydealingwiththebehavioranddecisionmakingbysmallunitssuchasindividualsandbusinesses
• Ceterisparibus–“allotherthingsheldconstant”• Whenevalua=ngdemandweareonlyconcernedwiththequan2tythatpeoplewouldwantandbeabletobuyatdifferentprices.
• Example:HowmanypeoplewouldwanttoseeamovieonagivenaJernoonifthepricewas$5;whatifthepricewas$10?Wedon’tconsiderifitwasaholidayorhowmanyothermovieswereplayingorhoweasyitistopurchase=ckets.
Demand• DemandSchedule–lis=ngshowingthequan=tydemandedatallpossibleprices• Seethedemandscheduleforanindividualforburritos
• Notethatconsumersarewillingandabletobuymoreofaproductasthepricedecreases.• Thisshowsaninverserela=onshipbetweenpriceandquan=tydemanded.
DemandCurve• DemandCurve–graphshowingthequan=tydemandedateverypossibleprice• No=cethatdemandcurvesarealwaysdownwardsloping.
• ThedemandcurveisformedbyploUngthecombina=onsofpriceandquan=tydemandedfromademandschedule.
• Seethedemandscheduleforanindividualforburritosatright.
MarketDemand
• Marketdemandcurve–demandcurvethatshowsthequan==esdemandedbyeveryonewhoiswillingandabletopurchasetheproduct.• Addtheindividualdemandcurvestogetherbyaddingthequan==esforeach
ateachprice.
TheLawofDemand• LawofDemand–rulesta=ngthatmorewillbedemandedatlowerpricesandlessathigherprices• Notethataninverserela2onshipexistsbetweenpriceandquan=tydemanded.
• Thinkabouthowmuchthismakessense!• Itexplainswhystoresputthingsonsale.
MarginalUtility• U:lity–theamountofsa=sfac=onthatsomeonegetsfromtheuseofaproduct
• Marginalu:lity–theaddi2onalsa=sfac=onthatapersongetsfromconsumingonemoreunitofaproduct
• Diminishingmarginalu:lity–thedecreaseinaddi=onalsa=sfac=onthatapersongetsasmoreunitsofaproductareconsumed• Thismeansthattheextrasa=sfac=onthatwegetfromusingaddi=onalunitsoftheproductbeginstodecline.
• Becauseoursa=sfac=onisdecliningwitheachunit,ourwillingnesstobuymoreoftheproductdeclines.
• ThisconcepthelpstoexplaintheLawofDemand.• CarlMenger(1840–1921)–Economistwhochallengedthetradi=onalbeliefthatthevalueofaproductisderivedfromthecostofthelaborthatgoesintomakingthatproduct.Hebelievedthataproductderivesitsvaluefromthesa=sfac=onthatconsumersgetfromtheproduct.
ChangeinQuantityDemanded• Changeinquan:tydemanded–movementalongthedemandcurveshowingthatadifferentquan=tyispurchasedinresponsetoachangeinprice• Considerthemarketdemandcurveforburritosatright.
• Ifthepriceofburritosisreducedfrom$5to$3,thequan=tydemandedincreasesfrom24millionto40million.
• Thisisaslidealongthedemandcurvefrompointatopointb.
EffectsExplainingtheChangeinQuantityDemanded• Onlyachangeinpricecancauseachangeinquan=tydemanded.Herearetworeasonswhy…• Incomeeffect–thepor=onofachangeinquan=tydemandedcausedbyachangeinaconsumer’sincomewhenthepriceofaproductchanges• Ifpricesgoup,consumersdon’thaveasmuchoftheirincometospendonthisorotherthings.Theyare,ineffect,poorer.So,theymaybuylessofthisproduct.
• Subs:tu:oneffect–thepor=onofachangeinquan=tydemandedthatisduetoachangeintherela2vepriceoftheproduct.• Ifthepriceofburritosgoesup,consumersmayreplacebuyingburritoswithbuyinglessexpensiveproductslikeburgersorpizza.So,theybuylessburritosandbuydifferentfoodinstead.
ChangeinDemand• Changeindemand–differentquan==esofaproductaredemandedateveryprice,causingthedemandcurvetoshiJtotheleJortotheright.• Thisiscausedbyfactorsinthemarketotherthanprice.• AshiJtotherightisanincreaseindemand.• AshiJtothele9isadecreaseindemand.
ChangeinDemand(Shift)
Factorscausingachangein
demand(shiJofcurve)
ChangesinConsumerIncome
ChangesinConsumerTastes
ChangeinthePriceof
Subs=tutes
ChangeinthePriceof
Complements
ConsumerExpecta=onsfortheFuture
TheNumberofConsumers
ChangeinDemand(Shift)
ChangesinConsumerIncome
• Whenpeopleearnmore,theyarewillingtobuyhigherquan==esatallpossibleprices.
• HigherincomemeansanincreaseindemandandashiJright.
• LowerincomemeansadecreaseindemandandashiJtotheleJ.
ChangesinConsumerTastes
• Adver=sing,fashiontrends,peerpressureandachangeinseasonsallaffectconsumertastes.
• ApopularityincreasemeansanincreaseindemandandashiJright.
• ApopularitydecreasemeansadecreaseindemandandashiJleJ.
ChangesintheNumberofConsumers
• Thiscanoccurthroughachangeinpopula=on.
• AnincreaseinthenumberofconsumersmeansanincreaseinmarketdemandandashiJright.
• AdecreaseinthenumberofconsumersmeansadecreaseinmarketdemandandashiJleJ.
ChangeinDemand(Shift)ChangeinthePriceof
Subs=tutes
• Subs:tute–compe=ngproductsthatcanbeusedinplaceofoneanother• BueerandmargarineorCokeandPepsi
• Demandforaproductincreases(shiJsright)ifthepriceofasubs=tuteincreases.
• Demandforaproductdecreases(shiJsleJs)ifthepriceofasubs=tutedecreases.
ChangeinthePriceofComplements
• Complement–relatedproductsthatareusuallypurchasedtogether• PaintandpaintbrushesorcomputersandsoJware
• Demandforaproductincreases(shiJsright)ifthepriceofacomplementdecreases.
• Demandforaproductdecreases(shiJsleJ)ifthepriceofacomplementincreases.
ChangeinConsumers’Expecta=onsforthe
Future
• Predic=ngtheeffectofchangesinconsumerexpecta=onsforthefuturerequiresspecificdetailsaboutthesitua=on.
• Anannouncementthatanewtechnologywillbeavailableinayearmaydecreasedemand(shiJleJ)forexis=ngproductsasconsumersdelaypurchasesun=lthenewproductisreleased.
DemandElasticity• Demandelas:city–theextenttowhichachangeinpricecausesachangeinquan=tydemanded.(Themarket’sresponsivenesstoachangeinprice.)• Elas:c–whenachangeinpricecausesarela=velylargerchangeinquan=tydemanded
(flatdemandcurve)• Example:Vegetables,whenoneisexpensive,youjustbuyadifferentone.
• Inelas:c–whenachangeinpricecausesarela=velysmallerchangeinquan=tydemanded(steepdemandcurve)• Example:Cancerdrug,youarenotmakingadecisionbasedonpricebutonwhetherornotyou
needit• Unitelas:c–whenagivenchangeinpricecausesapropor=onalchangeinquan=ty
demanded
ElasticityandPricingElas:cDemand
• Ifasellerraisespriceswhendemandiselas=c,theywillmakelessrevenue.
• Ifasellerlowerspriceswhendemandiselas=c,theywillmakemorerevenue.
Inelas:cDemand• Ifasellerraisespriceswhen
demandisinelas=c,theywillmakemorerevenue.
• Ifasellerlowerspriceswhendemandisinelas=c,theywillmakelessrevenue.
DeterminantsofDemandElasticity
• Ifaconsumercannotpostponethepurchase,demandtendstobeinelas=c.
• Example:prescrip=ondrugs,cigareees
Canthepurchasebedelayed?
• Themoresubs=tutesareavailable,themoreelas=cthedemandcurveis.• Example:food–ifonetypeismoreexpensive,youjustbuylessofitandmoreofsomethingelselessexpensive.
• Loca=onisimportanttoo.Ifthepricerisesatonestore,consumerswillshopatadifferentstore.Thismakesthedemandelas=c,evenifdemandintheen=remarketisinelas=c.
Areadequatesubs=tutesavailable?
• Iftheproductrequiresalargepor=onofconsumerincome,demandtendstobemoreelas=c.
• Iftheproductrequiresonlyasmallpartofaconsumer’sincome,demandismoreinelas=c.Ex:pepper
Doesthepurchaseusealargepor=on
ofincome?
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