The law of demandWhat is the law of demand?

How do income and the law of diminishing marginal utility apply to demand?

What’s the difference between the change in quantity demanded and a change in demand?

What causes a change in demand?

Gut Check!

• What is demand?Amount of a g/s consumers are willing & able to buy at all

prices in a given period.• What is quantity demanded?Amount of g/s consumers are willing & able to buy at a

specific price.• What is the relationship between quantity demanded and

price in a market?As price increases, quantity demanded decreases

– How do we show this relationship?– Using a demand curve (shows how price influences qd)

The law of demand

The law of demand: there is an inverse relationship between the price of a g/s and the quantity demanded by consumers.– This makes sense to us: When a g/s goes on

sale, consumers buy (demand) more because the price is reduced.

Why do price and qd move in opposite directions?

• The law of diminishing utility“thinking at the margin” principle tells us consumers choose not whether to buy, but how much to buy. This raises the question of utility: satisfaction in consuming one more item

• The income effectScarcity of income means that if the price of a g/s increases, people won’t be able to buy the same quantity as they did @ original price

• The substitution effectsubstitute goods are a type of good that can satisfy the same want as an “original” good, but often at a lower cost (competition)– At some point, people will substitute the cheaper good due to

price – Ex: “Dr. Thunder” rather than Dr. Pepper

Quick, important points

• Diminishing marginal utility, income effect, and substitution effect cause consumers to react in predictable ways to a change in price of a g/s

• As consumers buy more (decrease price) or less (increase price), the qd is said to “move along the demand curve”– This is called the change in quantity demanded– It is only caused by a change in price.

How to show a change in quantity demanded

• Use a demand schedule (table of data)

• Then, graph the demand curve!

• Remember, this graph would be used for a change in price only.

• Any change in qd will be along the curve, not a new one.

P QD

How is a change in demand different?

• A change in demand is due to factors other than just price of a g/s.– Remember, a change in quantity demanded is due to

price of one item– This change happens when quantities demanded

increase or decrease at all prices, not just one.

• The demand curve will shift, or move an entire curve, to the left (decrease in demand) or to the right (increase in demand)

Demand Curves: CD vs QD

What can cause a change in demand? (“demand shifters”)

• Number of buyers– Based on increase/decrease in population

• Tastes/preferences– Fads, fashions, advertising…

• Expectations of buyers– Depending on what’s currently happening

• Income

• Prices of related goods

What can cause a change in demand?

• Income– Normal good: any good for which there is a direct

relationship between changes in income and its demand curve

• Increase income=purchase more; curve right• Decrease income=purchase less; curve left• Ex: new cars, steaks, brand-name products

– Inferior good: any good for which there is an inverse relationship between changes in income and its demand curve

• Decrease income=increase in i.g. purchase; curve right• Increase income=decrease in i.g. purchase; curve left• Ex: generic brands, used cars, hamburger instead of

steak

What can cause a change in demand?

• Prices of related goods– Substitute good: type of good that can satisfy the

same want as an “original” good, but often at a lower cost—this causes competition for purchases

• Direct relationship between a price change for one good and the demand for its “competitor” good

– Complementary good: a good that is purchased along with another

• Inverse relationship between a price change for one good and the demand for its “go together” good

Quick, important points

• Movement along a demand curve is ONLY in response to a change in the price of one good (quantity demanded)

• Movement to the left or right of a demand curve is usually a result in the change of one good’s price as compared to the price of another (change in demand)

Mnemonic! (Demand shifters)

• Price (of complements/substitutes)• Income (determines normal/inferior)• Rates of interest• Adverse/good conditions (weather,

events)• Tastes/preferences• Expectations (of future markets)• Size of the market (population)