DemandUnderstandingEconomics–Chapter4

WHATISDEMAND? Chapter4,Lesson1

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.

FACTORSAFFECTINGDEMANDChapter4,Lesson2

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.

ELASTICITYOFDEMANDChapter4,Lesson3

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?