Demand

Chapter 3 - Understanding Individual Markets:

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$1D0 10 20 35 55 80Quantity Demanded

DemandPIncome EffectWhen things are expensive, money buys lessWhen things are cheap, money buys more

Substitution EffectWhen apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears

Diminishing Marginal UtilityEach additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower.Ex. When Im hungry, I typically will buy 2 breakfast tacos. The reason I dont buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third taco

Three Reasons Why the Law of Demand ExistsDP1P2QD1QD1

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0Quantity Demanded (bushels per week)Price (per bushel)PQd$543211020355580Individual DemandPQD12 4 6 8 10 12 14 16 18Demand Can Increase or DecreaseIncrease in DemandDecrease in DemandD2D3Change in Demand (curve) [TIMER]Demand ScheduleDemand is a whole bunch of QDs strung together.Demand [Curve]Lets take a look at some examples ofDiminishing Marginal Utility

.I ate one hamburger, and it tasted great. The next two tasted okay. I wish I hadnt have eaten the 5th. I cant finish the 6th. DIMINISHING MARGINAL UTILITYUtility (satisfaction) decreases as more of the same product is consumed.Disutility [or negative utility]?

About this time there is toilet trauma.

Or, inconvenienced afterward.

OK, it doesnt taste so greatDiminishing Marginal Utility5 Days Without Liquid

Too Much Relief?

Ill pay you $1 to drink another glass.1. (Demand/Supply) is identified as quantities consumers are willing and able to buy at various prices during a given time period.2. The law of demand says that price & QD are (directly/inversely) related.3. The most important variable influencing decisions to produce and purchase goods is (technique/price). (Price/income) is not held constant when moving along a stable demand curve.4. Income effect-the increase or decrease in purchasing power brought on by a change in (taste/market size/price).5. Substitution effect tendency to substitute a (higher/lower) -priced product for a more expensive product.6. Diminishing marginal utility utility, or (determination/anger/satisfation) decreases as more of the same product [Snickers] is consumed.7. The law of demand refers to a (movement/shift) along a demand curve.8. Substituting chicken as the price of steak goes up is an example of the (income/substitution) effect.9. When the price of caviar falls, the purchasing power of our money income rises & thus permits us to purchase more caviar. This is the (income/substitution) effect.10. The demand (curve/schedule) is a numerical tabulation showing QD at each price. The demand (curve/schedule) is a graphical representation of the law of demand.NS 1-10Total Receipts Test20 x $2 = $40.00

Total Receipts Test20 x $2 = $40

20 30 40 50$2$1InelasticElastic

30 x $1 = $30.0050 x $1 = $50Elastic or Inelastic(Total Receipts Test)

11. Elasticity of D the way price affects QD.12. Elastic - QD that is very responsive to price.13. Inelastic - a chg in price has little impact on QD.Elastic (flexible) DemandSubstitutes (butter)Luxury (mink coat)Expensive (car)Has durability (refrigerator)Lasts a long time (gas-guzzling car)

Inelastic (inflexible) DemandNo substitutes (milk)Necessity (insulin)Inexpensive (safety pin)No durability (pencil)Lasts only a short time (bread)

.Elastic Demand For Cassette Tapes

-$1D TR Test$2.50x100,000=$250,000$1.50x600,000=$900,000 +$650,000

+25% QD-$1

DTR Test$2 = $30 bil.$1 = $20 bil. -$10 bil.

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Elastic/Inelastic DemandThink of responsiveness as flatness.

Elasticity of Soft Drinks

Inelasticity of Milk

Estimating the Elasticity of Demand3 Key Questions:1. Subs? 2. Necessity? 3. Expensive?

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Consumers change their minds at each and every price.Based on good or bad publicity about OJ.

16 oz. Orange juice = 220 calories16 oz. Tomato juice = 78 calories Change in Demand [curve][TIMER]

Quantity Demanded vs. DemandQuantity Demanded [QD] is triggered by a price change.QD is the quantity of a good/service that people will purchase at a specific price at a given time.

Demand [D] is triggered by TIMER [non-price].A schedule of the total quantities of a good or service that purchasers will buy at different prices at a given time.Demand is a bunch of QDs strung together.Demand Shifters [TIMER]1. Taste [direct]2. Income [normal-direct] [inferior-inverse]3. Market Size [number of consumers-direct]4. Expectations [of consumers about future *price-direct, about future availability-inverse, or about future incomedirect.5. Related Good *Prices [substitutes-direct] [complements-inverse]Change in D [curve]1. Non price change [TIMER]2. Whole D curve shifts[There is a change in QD but it isnot caused by a change in price.[QD-single price; D-all prices]Complement[inverse]Substitute[Direct]ButterBreadBagelsP

D3D1D2QD3QD1QD2D1D2PP1QD1P2D1D2D

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QD2

1. An Increase in Taste shifts the D curve right a. The Nehru jacket came & went in 6 months. b. Jordache Jean demand created by TV c. Leisure suits and bell bottoms. d. Technological change may cause consumer taste to change [slide rules].

D1

D3P QD1

Bell BottomsMiniSkirtsHip HuggersPlatformsD2QD2QD3Change in Taste

Jordache

Normal Good goods whose demand varies directly with income.Inferior Good goods whose demand varies inversely with income.Butter, filet, steel-belts, new clothing & new cars v.Margarine, spam, used tires, old clothing & old cars

IncomeDemand For SpamDemandForSteak

2. Change in IncomeThe Impact of a Change in IncomeHigher income decreases the demand for inferior goodsHigher income increases the demand for normal goods

As the recession worsened in 2010, spam companies put in two shifts of workers cranking out Spam 7 days a week. A 12-ounce can that doesnt require refrigeration and can last for years cost only $2.40. At least families are putting something on the table resembling meat.23

D1 D2P

QD1QD2[Number of Consumers]

More demand for both normaland inferior goods.

3. Change in Market Size [Direct] can increase/decrease from economic decisions, advertising, andgovernment political decisions (China).Ex: The large baby boom of 1946-64increased the demand for baby supplies. An increase in life expectancy increased demand for for medical care, retirementcommunities, and nursing homes.Increase in # of consumers

3. Market Size (direct) (# of consumers)

D1 D2PQD1QD24. Expectations [of consumers][about future price, availability, & income]

If the iPad is expected to increasein price from $499 to $799.iPad

D1 D2P

QD1QD24. Expectations [of consumers][about future income]

Lets say that we are coming out of recession & consumersfeel secure about their jobs. [Positive future income]

D1D2P

QD1QD24. Expectations [of consumers][about future income]

Lets say that we are going into a recession and consumersdont feel secure about their jobs. [Negative future income]

Consumer expectations about future product price, future availability, & future income.

Ex: When the Korean War broke out in thesummer of 1950, new car sales boomed (also washers and refrigerators) out of the expectation of a production stoppage like during WWII. None occurred but it was the expectation that affected new car demand.car

4. Consumer Expectations

Complement[Inverse]Substitute[Direct]Gangsta GrillsChrysler 300sToyotasD1D2PP1QD1P2D1D2

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QD2

MV X PQ[Substitutes-Direct; Complements-Inverse]

5. Prices of Related Goods

QD1 QD2There are three types of goods.Independent goods price change of one has no impact on the other. Ex: fishhooks and pantyhose or salt and shoelaces

2. Substitute goods(competing goods) - price change of one affects the demand of the other directly. Ex: 7Up & Coke or Miller & Bud

3. Complementary (go together) - price change of one affects the demand for the other inversely.

Beer BL Student

No, I want to learn econ.No demandfor beer

D1D2

QD2 QD1D2D1

CameraFilmCereal & milk Coffee & donutsPeanut butter & jelly 5. Prices of Related Goods

PriceOf7UPDemand for Dr Pepper[Increase in price of one; increase in D of the other]

PP2

P1QD2 QD1

QD QDDD1

D2Substitutes - DIRECT

[Decrease in price of one; increase in the D for the other]

Boat PricesGasoline DemandP

QDD1 They are so cheap that even dogs are buying boatsP1P2QD1 QD2

Im making more money without dropping my prices.

D2

No changein price

Complements - INVERSEQD.?

Ok, so Im only 17. This is how cigarettes age you.P

The price of cigarettes are expected to increase sharply in the future.2. Substantial increase in market size affect the demand for cancer sticks.3. A cure for lung cancer impacts the demand (taste) for cancer sticks.4. Cigar prices increase which affect the demand for cigarettes(a substitute).5. The surgeon general has just warned that smoking causes cancer, severe facial wrinkles, ashtray breath, ashtray smelling clothes & hair, chronic cough, yellow teeth, impotency, and ugly warts all over the lips.

+D+D+D+D-DEffect of Demand for Cigarettes

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[DIRECT][inverse]

Hot DogsHamburgersPancakesSyrup

SubstitutesPriceDecreasesPriceDecreasesPD2DD1 QD2 QD1QD1 QD2P1P2ComplementsPriceDecreasesDemandIncreasesPD1D2DP1P2QD1 QD2

QD1 QD2

Substitute/Complement Relationships

Decrease in D

Increase in QD[caused by a decrease in price]Decrease in QD[caused by an increase in price]1. Price change2. Movement3. Point to point[Snap shot of 1 pt in time]

Change in D [TIMER]1. Non-price2. Whole curve3. Shift[Time passes]What could cause an increase in Demand? 5. Expectations of a shortage1. Increase in taste 6. Expectations of a price increase2 .Increase in income [normal good] 7. Expectations of positive future income3. Decrease in income [inferior good] 8. Incr in price of a substitute for product X 4. Increase in market size [# of consumers] 9. Decr in price of a complement of product XP1P2QD1P1P2QD1

DDD1D2D1D2

PP

Increase in D

Change in QD [Change in PRICE]

QD2 QD2

1. What would cause an increase in QD for Snickers? a. increase in number of consumers b. decrease in the price of Snickers c. decrease in income d. increase in the price of Snickers

2. What would cause an increase in D for Snickers? a. increase in taste for Snickers b. decrease in the price of Snickers c. decrease in incomed. increase in the price of Snickers

3. What would cause a decrease in QD for Snickers? a. increase in taste for Snickers c. decrease in the price of Snickers b. Increase in # of consumersd. increase in the price of Snickers

4. What would cause a decrease in D for Snickers? a. decrease in income c. increase in the price of Snickers b. increase in taste d. decrease in the price of Snickers

5. An increase in the price of Butterfingers would cause a(n) (increase/decrease) in (QD/D) for Snickers?QD & D Practice Quiz [Snickers]1. (Demand/Supply) is identified as quantities consumers are willing and able to buy at various prices during a given time period.2. The law of demand says that price & QD are (directly/inversely) related.3. The most important variable influencing decisions to produce and purchase goods is (technique/price). (Price/income) is not held constant when moving along a stable demand curve.4. Income effect-the increase or decrease in purchasing power brought on by a change in (taste/market size/price).5. Substitution effect tendency to substitute a (higher/lower) -priced product for a more expensive product.6. Diminishing marginal utility utility, or (determination/anger/satisfation) decreases as more of the same product [Snickers] is consumed.7. The law of demand refers to a (movement/shift) along a demand curve.8. Substituting chicken as the price of steak goes up is an example of the (income/substitution) effect.9. When the price of caviar falls, the purchasing power of our money income rises & thus permits us to purchase more caviar. This is the (income/substitution) effect.10. The demand (curve/schedule) is a numerical tabulation showing QD at each price. The demand (curve/schedule) is a graphical representation of the law of demand.NS 1-1011. Elasticity of demandthe way price affects (attitude/quantity/market size).12. (Inelastic/Elastic) demand demand that is very responsive to price. [A small price increase causes a large decrease in quantity demanded.]13. (Inelastic/Elastic) demand-when a change in price has little impact on QD.14. The 3-item test for elastic demand are substitutes, luxury items, and (inexpensive/expensive) items.15. The 3-item test for inelastic demand are no substitutes, necessities, and (inexpensive/expensive) items.16. Expensive cars have (inelastic/elastic) demand.17. Pepsi Cola has (inelastic/elastic) demand.18. Insulin has (inelastic/elastic) demand.19. The elastic demand curve is more (horizontal/vertical). [much change]20. The inelastic demand curve is more (horizontal/vertical). [not much change]

NS 11 - 20

21. With the invention of the calculator, the demand curve for the slide rule (increased/decreased). 22. When Forest Gump went to China & the U.S. followed by opening up relations with China, the demand curve for Coke (increased/decreased). 23. An increase in income would (increase/decrease) the demand for used clothing. [inferior good]24. A decrease in income would (increase/decrease) the demand for lobster. [normal good]25. A decrease in the price of product X [lumber] will (incr/decr) the demand for the complementary product Y. [nails]26. After Brooke Shields[15] did her national TV ads[Nothing comes between me and my Calvins], the D curve moved (right/left).

NS 21-26

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27. An increase in the price of Pepsi causes the demand curve for Coke to move to the (right/left). 28. If there is a sale on shirts, the demand curve for ties will move to the (right/left). 29. If a mans workplace is about to close down, his demand curve for major purchases would move to the (right/left).30. If a cure for lung cancer were found, the demand curve for cigarettes would move to the (right/left).31. If the price of pancakes decreases, the demand for syrup, a complement, will (increase/decrease).32. If the price of butter decreases, the demand for margarine will (incr/decr).33. A change in QD is caused by (price change/TIMER) [a movement]34. A change in D is caused by (price change/TIMER) [a shift]NS 27-38e

QuantityPD1[caused by TIMER]D2

QD1

QD2

Increase in Demand [curve]D is a whole bunch of QDs strung together.Decrease in D1. Decrease in Taste2. Decrease in income [normal good]3. Increase in income [inferior good]4. Decrease in # of consumers5. *Consumer expectations of a price decrease6. Consumer expectations of large surpluses [price will fall]7. Consumer expectations of negative future income8. *Decrease in the price of a substitute [direct] for product X9. *Increase in the price of a complement [inverse] for product XIncrease in Demand [curve]1. Increase in Taste2. Increase in income [normal good]3. Decrease in income [inferior good]4. Increase in # of consumers5. *Consumer expectations of a price increase6. Consumer expectations of a shortage7. Consumer expectations of positive future income8. *Increase in the price of a substitute [direct] for product X9. *Decrease in the price of a complement [inverse] for product X