Econ lecture on demand

T H E L AW O F D E M A N D

D E F I N I T I O N O F D E M A N D

• Being willing and able to purchase a good or service at a particular time and place at a given price.

• Varies inversely with price

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T H E B U Y E R ’ S T R A D E - O F F

• Think of this in terms of a trade-off that all people do in determining whether or not to become a buyer:

• If I choose to buy, then I get the benefit of what I purchased at the cost of what I could have purchased.

• We represent what you could have purchased with a price.

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L AW O F D E M A N D

• As the price rises, the quantity demanded falls

• Or, as the price falls, the quantity demanded rises.

• Ceteris Paribus “All things remaining constant.

• The demand curve downward slope shows the trade-off a buyer makes

W H Y T H E L AW W O R K S

• As the price of a good increases people are more willing to substitute other items. (Substitution Effect)

• People prefer lower costs if all things are equal.

M A R G I N A L U T I L I T Y• Think of the Demand curve like a Marginal Utility

curve:

• Buyers will continue to buy as long as the price they pay is less than the benefit they receive.

• Typically buying a good/service provides satisfaction/usefulness.

• However, as you continue to buy your satisfaction declines. This decline is know as Diminishing Marginal Utility

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S H I F T I N G D E M A N D

• When candy is sold, buyers wish to buy at as low a price as possible

• If we find out that candy enhances intellectual ability, we might find more people buying more stuff at a higher price: an increase in demand.

• If we find out that candy is poison, we would likely have the opposite effect.

S H I F T I N G D E M A N D

• We would also see more demand if we allowed people to buy on IOU’s

• Remember the definition of demand?

• Willing and Able to Buy

• If people increase their ability to buy (having more money, can buy on IOU’s) their demand goes up.

• If people increase their willingness to buy (candy makes you smart) their demand goes up also.

S H I F T I N G D E M A N D

• Six factors cause a shift in demand

• 1. Consumer Income

• 2. Future Expectations

• 3. Population of buyers

• 4. Consumer Tastes/Popularity

• 5. Price of Complementary Goods

• 6. Price of Substitute Goods

P R I C E E L A S T I C I T Y O F D E M A N D

• DEF: How consumers respond to a change in price of a good/service.

• Change in cost (price) can result in large changes to the Quantity Demanded

• Inelastic Demand is a small change in QD as a result of more modest changes to price

C A U S E O F E L A S T I C I T Y

• If you can switch to a substitute this creates market competition and can result in lower prices

• If an item is a large purchase item purchases are often delayed causing lower demand for them

• Necessity vs. Luxury = prioritizing needs over wants affects demand

• Time - Can it be a long term purchase