DEMAND

1
DEMAND

• Economics
• Chapter 4

2
What is Demand?

• To want or not to want? That is the question!

Ferrari F-430 Retail 350,000
Rolex Crown Collection Retail 64, 500
Chloe Platinum 2ct Eternity Ring 5,629.73
ISA Ancona Yacht List 14,500,000
Lamborghini Gallardo Retail 310,000
3
Does WANT DEMAND?

• Three Criteria have to be met
• Desire
• Ability to Pay
• Willingness to Pay

• Demand the desire, ability, and willingness to
  purchase goods and services.
• Demand is the amount consumers will buy at
  various prices.

4
Determining Demand
5
THE DEMAND SCHEDULE
When you have an idea how many people will buy at
a range of prices, then you can create a Demand
Schedule a list of the quantity demanded at
each and every possible market price.
According to the schedule, what is the
relationship between price and quantity?
6
The LAW of DEMAND

• As prices rise, the QUANTITY DEMANDED falls.
• and vice versa
• As prices fall, the QUANTITY DEMANDED increases.

7
WHY DOES A CHANGE IN QUANTITY DEMANDED OCCUR?

1. The Income Effect
2. The Substitution Effect

8
INCOME EFFECT

• As prices go down, consumers real income goes
  up! They can buy more with each dollar.
• As prices go up, consumers real income goes
  down! They can buy less with each dollar.

P
I
9
Substitution Effect

• As the price for a good or service increases,
  consumers will substitute another good or service
  that is cheaper.

10
Demand Schedule

• A TABLE showing the amount that will be purchased
  at various prices.

Price Quantity 1.00 10 2.00 5 3.00 2
11
DEMAND CURVE

• A GRAPH that shows the amount that will be
  purchased at VARIOUS PRICES.

12
What causes a change in quantity demanded?

• A change in price.

13
The LAW of DEMAND

• As prices rise, the QUANTITY DEMANDED falls and
  vice versa along a constant demand curve, CETERIS
  PARIBUS.

14
Ceteris Paribus

• It means
• While one thing changes (price), everything else
  remains the same.

15
The Demand Curve
24
22
20
18
Price per Unit
16
14
12
10
8
6
4
2
20
40
60
120
100
80
140
160
180
Quantity Demanded
16
Demand Curve
The line d-d is the Demand Curve
24
d
22
20
18
Price per Unit
16
14
12
10
8
6
4
d
2
20
40
60
120
100
80
140
160
180
Quantity Demanded
17
Demand Curve
24
d
22
When prices up
20
18
Price per Unit
16
Quantity demanded
14
12
10
8
6
4
d
2
20
40
60
120
100
80
140
160
180
Quantity Demanded
18
Demand Curve
24
d
22
When prices down
20
18
Price per Unit
16
Quantity demanded
14
12
10
8
6
4
d
2
20
40
60
120
100
80
140
160
180
Quantity Demanded
19
Change in Quantity Demanded? Or Change in Demand?

• What is the difference between a change in
  quantity demanded and a change in demand?
• Change in quantity demanded
• What is caused by simply increasing or decreasing
  price
• Everything else remains constant
• Only movement in demand is along the demand curve

20
Change in Quantity Demanded?OrChange in Demand?

• Change in demand change that occurs because of
  changes in variables other than price
• NOT just moving along the demand curve instead,
  the entire demand curve has shifted there is an
  entirely new demand curve
• At every single price, consumers would purchase a
  different amount than before

21
Demand Curve Shifts
Shift reflects that people will either

• Buy different amounts of the product at same
• OR
• Buy more (or less) at all prices

How does the demand curve actually shift?
22
Demand Curve
d1
Price per Unit
20
Increasing Demand
10
d1
20
50
80
100
170
260
Quantity Demanded
23
Demand Curve
d2
d1
Price per Unit
20
Increasing Demand
10
d2
d1
20
50
80
100
170
260
Quantity Demanded
24
Demand Curve
d1
Price per Unit
20
Decreasing Demand
10
d1
20
50
80
100
170
260
Quantity Demanded
25
Demand Curve
d1
d2
Price per Unit
20
Decreasing Demand
10
d1
d2
20
50
80
100
170
260
Quantity Demanded
26
Why Does Demand Change?
Prices of Related Products (Substitutes
Complementary Goods)
P I T
Consumer Income
Consumer Tastes
Change in Expectations
Change in Number of Consumers (Population/Demograp
hics)
27
PRICES OF RELATED PRODUCTS
Substitutes
e.g., Butter v margarine
Coffee v. tea
Electric shavers v. razors
New cars v. used cars
Steak v. chicken
28
PRICES OF RELATED PRODUCTS
Complements
e.g., Computers Software
Printers and print cartridges
Game players and games
Peanut Butter Jelly
29
CONSUMER INCOME
Demand Shifts Right
Demand Shifts Left
30
CONSUMER TASTES
Advertising, trends, fads
Demand Shifts Right
More popular
Less popular
Demand Shifts Left
31
CONSUMER EXPECTATIONS

• Based on what you expect to happen with the price
  of a want is price going up or is it going on
  sale?

CHANGE IN NUMBER OF CONSUMERS

• Population trends think baby boomers?
• Demographics characteristics of populations
  have large impact on demand
• Age, race, gender, occupation, income level, etc.

32
GRAPHING EXERCISES
Draw theoretical graphs of shifting demand
curves for consumer goods in each of these
scenarios.

1. Job market very hot in Orange County
2. Exodus from the North to South
3. Third year in a row with no raises
4. Your father gets a big promotion!
5. People have become bored with Wii

33
Demand Elasticity is the extent to which a
change in price causes a change in demand 3
possibilities

• ELASTIC DEMAND
• a change in price causes a large change in
  quantity demanded
• demand stretches as the price of the goods
  changes
• Elastic goods usually seen as luxuries by
  consumers

34

• UNITARY ELASTIC
• price change change in quantity demanded
• Price change causes a directly proportional
  change in the quantity demanded
• e.g., price increase of 50 causes a 50 change
  in quantity demand

• INELASTIC DEMAND
• a change in price causes little change in
  quantity demanded
• Demand is relatively unresponsive to price
  changes
• Inelastic goods usually seen as necessities by
  consumers

35
Determining Demand Elasticity

• Three Questions for determining
• Is it a necessity or a luxury?
• Can the purchase be delayed?
• If a luxury can be delayed, its elastic
• If its a necessity, its inelastic
• Are substitutes available?
• If yes, its elastic
• Does the purchase require a large amount of ?
• If yes, its elastic
• But what about medical expenses they can be
  very expensive
• BUT, are also seen as a necessity, so would be
  inelastic.

36

• But why even determine demand elasticity.why
  does it even matter?
• Producers need to determine how elastic demand is
  for their product in order to set pricing for
  their product.
• What will happen to their revenue if the demand
  for their good is elastic and the price is raised
  considerably?

37
Determining Demand Elasticity
Consider the following examples
Steak
Automobiles
Gasoline
Table Salt
Cosmetic Surgery
Insulin
Heart Surgery
OTC Headache Medication
Alcoholic Beverages
Cigarettes
38
MARGINAL UTILITY
Utility
Marginal Utility

Extra satisfaction from one more unit but..
39
DIMINISHING MARGINAL UTILITY


Extra satisfaction from additional units begins
to diminish get most satisfaction from the
first unit.. How many hamburgers can you really
enjoy at one sitting?
40
GRAPHING EXERCISE
Draw theoretical graphs of shifting demand
curves based on the following consumer taste
scenarios

• iPhone 5s have become wildly popular in the last
  year
• There has been a category 4 hurricane that wiped
  out the banana crop
• People have become bored with Tickle-Me-Elmo
• Best fishing season ever in central Florida!
• Surf wear is hot this year.