DEMAND In order to have demand you need
someone with the desire for the product, ability to pay, and willingness to purchase. (BUYER).
A change in price creates a change in the QUANTITY demanded.
The Law of Demand states that as price goes up, demand goes down.
Demand Schedule Table showing what
price potential buyers would buy a product/service during a particular time
P = price Q = # items
consumers would buy at that price
P Q(in thousands)
$140 0
$120 5
$100 10
$50 20
$0 35
Demand Curve Curve that
represents a demand schedule
What happens to the price as the quantity goes up?
Vice versa?
CHANGE IN QUANTITY DEMANDED VS. A CHANGE IN
DEMAND
This is a very important concept and one you must know by heart.
A change in quantity demanded is caused by a change in price. Higher price, lower demand and vice versa. This causes movement along the demand curve itself. The movement may be up or down the curve.
A change in demand causes a shift of the entire demand curve. These changes are caused by shifters or determinants.
Shifters or Determinants
If the following create a shift of the demand curve to the left it is a decrease.
If they create a shift to the right it is an increase.
Memorize that leftward movement is a decrease and rightward movement is an increase.
This will be less confusing than learning it as up and down.
DETERMINANTS OR SHIFTERS#1. Changes in Consumer Tastes
A change in consumer tastes – what if you found out oranges could prevent cancer?
A change in the number of buyers – which way is the shift if the population suddenly decreases for some reason? What if the population increases?
Suggest some other changes…
DETERMINANTS - #2CHANGES IN CONSUMER INCOME
Changes in consumer income change the demand for …
Normal Goods v. Inferior Goods Normal Goods are your first choice Inferior goods are what you settle for.
#2 Income changes While you are in school and your income is
low you might want the bike. You graduate and start climbing the
corporate ladder – time for the SPORTS CAR. – income up – normal good is chosen
The sports car is your normal good because it is your preference.
If you lose your job – income down – inferior good is chosen – bike.
Movements on a Graph
Income changes and resultant shifts can be shown on a demand graph.
Draw a demand curve for a bike as a student would experience it. Show the shift in demand when the student gets a good-paying job.
Do the same thing for the sports car. When did you shift left, when did you shift
right on these two items.
COMPLEMENTSA RELATED GOOD Complements are goods that go
together: Shoes and Socks Bread and Butter Camera and Film
A change in the cost of one good causes a change in demand for the other. Demand moves opposite of cost of the other product. Price down, demand up and vice versa.
SUBSTITUTESANOTHER RELATED GOOD
Substitutes can be used in place of another good – just like a substitute teacher.
– Margarine for Butter
– Hamburger for Steak
– Tea for Coffee When the cost of one rises the demand for
the other good changes in the same direction. Cost of butter goes up; therefore, the demand for margarine (the cheaper product) goes up.
GRAPHING CHANGES Think about the law of demand:
Price Up, Demand Down or Price Down, Demand Up
Consider Complements: If the price of coffee goes up and you like donuts with your coffee, what happens to the demand for donuts.
What might be another example?
GRAPHING CHANGES Now consider substitutes.
– You like steak but you lose your job, income change, what can you substitute?
» Or
– You are a student who has been eating hotdogs and beans. You graduate and get a job. What will you choose now?
– Graph the changes making sure you completely label your graph.
DETERMINANTS #4POPULATION CHANGES
Changes in the number of buyers will also shift the demand curve.
– Population up – demand shifts right
– Population down – demand shifts left
Equilibrium Price
the price at which the quantity of a product offered is equal to the quantity of the product in demand
Key Results of Shifts in Demand
If an event increases demand, the demand curve will shift outward and to the right. If the supply curve is not affected, the equilibrium price and quantity will increase.
Key Results of Shifts in Demand
If an event decreases demand, the demand curve will shift inward and to the left. If the supply curve is not affected, the equilibrium price and quantity will decrease.
Elasticity
A measure of the degree of responsiveness of one variable to changes in another
Used by companies to maximize their profits (i.e. OPEC)
Price elasticity of demand relative degree of responsiveness of
the quantity demanded to relatively small changes in its price
Slope of a demand curve is steep, then an increase in price won’t change demand much (inelastic demand – table salt)
Slope of a demand curve is shallow, increase in price will drastically change demand (elastic demand - house)
Price Elasticity of Demand
Ed = (% change in quantity demanded of X)/(% change in the price of X)
Ed = (change Q/Q) * (change P/P) E is less than 1 = inelastic E greater than 1 = elastic
Example: CD sales
Want to calculate the price elasticity CD sales at $12.
E = ((Q1-Q0)/Q0)/((P1 P0)/P0)
E =
((925-1000)/1000))/((13-12)/12) E= -0.075/0.083 E = -0.9 Elastic or inelastic?
Price Quantity Demand (per month)
$11 1,100
$12 1,000
$13 925
Example: CD sales: Answer
E = ((925-1000)/1000))/((13-12)/12) E= -0.075/0.083 E = -0.9 Elastic or inelastic?
Unit Elasticity Any percentage change in demand is
answered by an equal percentage increase in price
Example: A card is $1 at 1Million demand. At $1.50, demand is 1.5 million. At 50 cents, demand is 500 thousand.
Perfectly Elastic Demand
For a given demand, price does not change.
E = Infinity Anything above a certain price,
demand will be zero. At or below that price, there is no limit to demand.
Homework
1. Draw the demand curve. Determine the elasticity at each price. At what price(s) is the ice cream inelastic? At what price(s) is the ice cream elastic?
Price ($) Demand (millions)
.5 16
1 13
1.5 10
2 7
2.5 4
3 1