3.1 nature of demand

3.1 Nature of Demand

Introduction to Economics – Gr. 12

Text: Holt EconomicsMs. Rasha Ghappour

Suppose you had 100LE and want to purchase some CD’s – but you don’t necessairly want to spend all your money.

How many would you purchase if the CD’s were 10LE? 25LE? 40LE? 60LE? 100LE?

As a class we will complete the following demand schedule:

Price per CD

10LE 25LE 40LE 60LE 100LE

Quantity Demanded

Demand for products … What are some of the products you want

to buy in the near future? Can you ADD to the DEMAND of these

products now? – are you able to buy them now?

Consumers must be both WILLING and ABLE to buy a product to add to the demand for that product.

Definition of demand contains two important conditions:

The consumer must be willing and able to buy (i.e., the person must not only want the product

but also have the means to pay for it).  Demand for the product must be examined for

a specific period of time (e.g., a day, a week, or a month).The time period must be specific because various factors that change over time can affect the demand for a product.

Demand is the amount of a good or service that a consumer is willing and able to buy at various prices during a given time period.

Quantity demanded is the amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period.

Price per CD10LE 25LE 40LE 60LE 100L

E

Quantity Demanded

5 3 2 1 0

Price

QD

Demand Schedule – CD’s

Create a DEMAND SCHEDULE (a list of the quantity of goods that consumers are willing and able to buy at a series of possible prices - it shows the interaction of price and demand

in a simple table format) and a DEMAND CURVE ( a plot of this information on a

graph - quantities that might be purchased appear along the horizontal axis increasing from left to right. Prices appear along the

vertical axis increasing from bottom to top) to show it.HOW? – add the number of CD’s we are willing to

purchase at each price to complete the demand schedule then convert to a graph.

Price per CD10LE 25LE 40LE 60LE 100L

E

Quantity Demanded

Each point plotted on the graph represents a specific combination of price and quantity demanded. The curve slopes downward reflecting the greater quantity that consumers will buy at lower prices.

In other words – generally, the cheaper something is, the more of it people will buy of it – this is known as the law of demand.

A demand curve can show at a glance the rate of change at each price.

If the demand curve appears to be straight, it means that each change in price results in same change in the quantity demanded.

(Ex. Each change of 10 LE produces the same unit change of QD – at 10LE I want 10 CD’s, at 20 LE I want 8, at 30LE I want 6 and so forth)

Others may reflect greater changes in the quantity demanded at some prices than at others (more curved).

(Ex. At 10LE I want 10 CD’s but at 20 I only want 4 and at 30 I want 1)

Price is the main variable affecting demand. There is an inverse – or opposite – relationship between

price and the quantity demanded. The law of demand states that an increase in a good's

price causes a decrease in the quantity demanded and a decrease in price causes an increase in the quantity demanded.

Three economic concepts help explain the inverse relationship between price and QD that is the law of demand: 1. Income Effect.2. Substitution Effect.3. Diminishing Marginal Utility

The amount of money, or income, that people have available to spend on goods and services is called purchasing power.

As a consumer's purchasing power increases, his demand increases for goods and services.

A decrease in a consumer's purchasing power decreases demand.

Any increase or decrease in consumer's purchasing power caused by a change in price is called the income effect.

(Sometimes, the income effect does not apply).

It is the tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive. This effect explains the relationship between price and quantity demanded.

(Ex. Many families opting to buy more chicken as opposed to beef when beef prices soared.)

(Sometimes - like the income effect, the substitution effect does not apply.)

Utility describes the usefulness of a product or the amount of satisfaction that an individual receives from its consumption.

A product's overall utility increases as more units of a product are consumed. However, as more units of a product are consumed, the satisfaction received from consuming each additional unit declines.

This is called diminishing marginal utility because the marginal, or additional, utility of each unit consumed diminishes with each additional unit.

Total utility is the total amount of satisfaction the consumer obtains through consuming a certain number of units of a certain good.

Marginal utility is the additional satisfaction per additional unit of a certain good. 

Diminishing marginal utility helps explain why the demand for a product is not limitless. At some point, consumers cannot use any more of a product.

There is a limit to a product's utility and, thus, a limit to consumers' demand.

Law of Demand

Price changes have an inverse

effect on the quantity

demanded

Answer the following in your binder. Use the graphic organizer to summarize the economic concepts that help to explain the law of demand. Explain the difference between demand

and quantity demanded. What is the difference between a

demand schedule and a demand curve?