Demand

Chapter 4: Demand

1. Why would the broker recommend pitchforks?

2. Would the pitchfork producers benefit from this?

3. What would you think would happen to the price of the pitchfork?

What is Demand?

How do we account for buying a product?

What is marginal utility?How do we graph demand?

What is Demand?

The desire and willingness to pay for a product.

Firms provide us with goods and services based on the demand for that particular good/service.

Microeconomics

Deals with the basic unit in regards to economic activity.

Economists are going to look at you buying products and why you buy them.

This will reveal how prices are determined and how you make your decisions.

Demand SchedulesFigure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

Individual vs. Market curves

Individual curves show demand for only one in regards to a single product.

This graph represents the schedule on the previous slide.

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

Market curves

The market curve represents the demand of a product by everyone.

Schedules will usually be larger than those of the individual demand.

The Law of Demand

All of these concepts contribute to the law of demand.

The law states that the quantity of goods (Q) demanded varies inversely with the price (P) of the product.

Law of Demand ct’d

The inverse relationship between P & Q is something that we find in the market. When the price goes up, then demand usually goes down.

Common sense and simple observation are consistent with Law of Demand.

Demand and Marginal Utility

Marginal utility is important because it explains so much about the demand of products.

Diminishing marginal utility is a prime example of this.

When we use more and more of the product, the newness wears off and we want less of it.

Cartoon Analysis 4.1

1. D 4.

2. C

3. A

Criticizes business for overcharging, stockholders, executives, and employees for greed, rationalizing low-quality products and for irresponsibility toward the environment, conservatives for attacking any criticism of business, and the hypocrisy of business interests in seeking subsidies.

Factors Affecting Demand

What causes changes in demand?What are these factors?How are you going to account for them

on a graph?

Changes in Quantity Demanded

There are several factors that affect demand in the market.

Income has a huge effect.Substitution impacts that market to.

Income effect

When prices drop and you have money, you will buy it.

If you are broke then you will not buy as much of the product.

Substitution effect

This is where consumers substitute a good/service for a relatively similar one for a cheaper price.

Examples would be if movie theaters cost $7 and the rental place costs $3, You will be more likely to stay in and rent.

Changes in Demand

There are six major factors that affect the demand of a product. Consumer Income Consumer Tastes Substitutes and Complements Changes in Expectations Number of Consumers

Consumer Income

When your income goes up, you can afford more stuff and you will buy it.

Consumer Tastes

Not everyone wants the same stuff. This also plays a major role in the demand of a product.

When a product is successfully advertised, its popularity increases and people buy more of it.

Substitutes and Complements

Changes in price in related products will cause demand to change.

Substitutes are similar products that will either benefit or not from changes in demand.

Complements can cause demand shifts as well.

Expectations

The speculations of consumers will directly affect the demand curve.

If consumers hear about some new kind of technology or the development of a new product.

They will, in turn, buy or hold off on specific products.

Number of Consumers

Businesses will play the numbers game.

The more consumers, the better chance that the demand will go up.

Elasticity of Demand

What is elasticity?How does elasticity affect the demand

of a product?What factors determine demand

elasticity?

Elasticity

ResponsivenessDemand elasticity refers to the changes

in demand due to the change in price.

Elastic Demand

Change in (P) causes relatively larger changes in (Q) demanded.

If P is lower, Q will be higherIncrease in P = decrease in Q.

Demand Elasticity

Demand tends to be more elastic if close substitutes are available.

Demand is also more elastic if the good is a luxury, rather than a necessity.

Buyers have substantial time to react to price change.

Inelastic demand

Very little responsiveness to the change in P.

Most inelastic changes occur to products that consumers value very little. (Ex. salt, sugar, etc.)

Unit Elasticity

Occurs when the change in P will be proportional with changes in Q.

Section 3-15

Figure 4.6Estimating the Elasticity of DemandFigure 4.6Estimating the Elasticity of Demand

Total Expenditures Test

(P x Q)(P x Q) = total expenditures.Changes in expenditures depend on the

elasticity of a demand curve— if change in price & expenditures move in opposite

directions on the curve--demand is elastic if they move in the same direction--demand is

inelastic if there is no change in expenditures--demand is

unit elastic.