demand notes

© NTC/Contemporary Publishing

1

3CHAPTER DemandDemand

1


2

Demand

Demand (D) = Willingness and ability to purchase

Are you part of demand if you want something?

No, you must be able to purchase.

Are you part of the demand for skateboards if you are an 80-year-old billionaire?

Probably not. You would be able, but not willing, to buy a skateboard.

2


3

Markets

Market = a place where people buy and sell goods and services

Are these markets?

Swap meet

Internet shopping site

Mall

Fast food restaurant

Any place you purchase goods or services is a market.

3

Yes No


4

Goods and Services

Good = tangible item you can purchase

Service = intangible item you can purchase

4


5

Quantity Demanded Quantity demanded (Qd) = number of units

of a good purchased at a specific price

If CDs are $18Lisa buys 2 and Trevor buys 1

Quantity demanded is 3 (Lisa’s 2 + Trevor’s 1)

What is the difference between demand (D) and quantity demanded (Qd)?

Demand is the willingness and ability to buy. Quantity demanded is always a number.

At $18, Lisa and Trevor are both part of the demand for CDs. The quantity demanded is 3.

5


6

Law of Demand

If the price (P) of a good increases, then quantity demanded (Qd) decreases.

If P then Qd

If P then Qd

NOTE: The Law of Demand shows that quantity demanded moves in the direction of the price.

opposite

6

If the price (P) of a good decreases, then quantity demanded (Qd) increases.

Consumers are willing and able to purchase more at a lower price than at a higher price.


7

Law of Demand (continued)7

The more utility* you receive from a unit of a good, the the price you are willing to pay for it.higher

The less utility you receive from a unit of a good, the the price you are willing to pay for it.lower

* utility - usefulness, satisfaction


8

Law of Diminishing Marginal Utility8

Diminishing = declining

Marginal = additional

Utility = usefulness or satisfaction

Law of Diminishing Marginal Utility = As a person consumes additional units of a good, eventually the utility or satisfaction gained from each additional unit of that good will decrease.

+ +


9

Demand Schedule9

Price (P) Quantity Demanded (Qd) (in $) (in units)

$4 1$3 2$2 3$1 4

At $3 what is the quantity demanded?

At $1 what is the quantity demanded?

$3 2

$1 4

Is this demand schedule an example of the Law of Demand?

YesIf P then QdIf P then Qd

$4 1

$1 4$1 4

$4 1


10

$4 1

$3 2

$2 3

$1 4

Price(in dollars)

Quantity demanded

(in units)

Demand Curve10

Take another look:

$4 1

$3 2

$2 3

$1 4

4

3

2

1

0

Pri

ce (

in d

olla

rs)

Quantity demanded(in units)

1 2 3 4

A demand schedule can be made into a graph.

Both the demand curve and the demand schedule show the quantity demanded at each price level.

Demand Curve


11

Pri

ce (

doll

ars

per

qua

rt)

0

$1

100 200 300 400 500 600Quantity demanded of orange juice (quarts)

Shifts in Demand Curves11

Demand can change or shift.

Demand increases Demand curve shifts rightwardDemand increases Demand curve shifts rightward

What has happened to demand?

Shift right = Demand increased

What has happened to demand?

Shift left = Demand decreased

D3

D2D1

Original demand curve

A BC

Demand decreases Demand curve shifts leftward


12

What Causes Demand to Shift?12

Change in

1. income

2. preferences

3. prices of related goods

4. number of buyers


13

Changes in Income13

Does having the ability to buy more mean you are willing to buy more?

No. It depends on the good.

Income increases

Income increases

Income increasesSmile Smile

Normal good

Inferior good

Neutral good

Buy more

Buy less

Buy the same


14

Changes in Income14

An increase in income shifts the demand curve.

Normal good Shift right

Inferior good Shift left

Neutral good No shift


15

D1

Quantity demanded

Pri

ce

Changes in Preferences15

If preferences increase for a good, then the demand shifts right.

D2

D3

If preferences decrease for a good, then the demand shifts left.


16

Changes in Prices of Related Goods16

Substitutes = Similar goods. A change in price of one affects the demand for the other.

Pri

ce (

do

llar

s)

Pri

ce (

do

llar

s)

Quantity demanded of coffee (cups)

Quantity demanded of tea (cups)

0 5 10 15

1.50

2.00

Dc

DT1DT2

If the price of a good increases, what happens to the demand for its substitute?

Demand shifts right.

If the price of a good decreases, what happens to the demand for its substitute?

Demand shifts left.

The demand for a substitute good moves in the same direction as the change in price of the other good.

DT3

1.00

20


17

Change in Demand for Complements17

Complements = Goods that are used togetherP

rice

(d

oll

ars)

Pri

ce (

do

llar

s)

Quantity demanded of tennis rackets

Quantity demanded of tennis balls

0 20 25

50

60

DTR

DTB1DTB2

If the price of a good increases, what happens to the demand for its complement?

Demand shifts left.

If the price of a good decreases, what happens to the demand for its complement?

Demand shifts right.

The demand for a complementary good moves in the opposite direction as the change in price of the other good.

DTB3

40

30


18

Change in Number of Buyers18

D1

D2

D3

If the number of people in an area increases, what happens to demand?

It shifts right.

If the number of people in an area declines, what happens to demand?

It shifts left.

+

-

Quantity demanded

Pri

ce


19Quantity demanded

Pri

ce

0D1

A

Quantity demanded

Pri

ce

0D1

Change in Demand or a Change in Quantity Demanded

19

Change in demand = shift in demand curve

Change in quantity demanded = movement from one point to another along the same curve

D2

B


20

Quantity demanded

Pri

ce

0

D1

Quantity demanded

Pri

ce

0

D1

A

20

D2

D3

If you only change price, what changes?

Quantity demanded

A change in demandWhat causes the demand curve to shift?

What are the four shift factors?

Changes in income, preferences, related goods, number of buyers

If you only change the price, does the demand shift?

No. It is a change in quantity demanded.

B

C


21

21

Elasticity of Demand

Elasticity of demand explains the relationship between the percentage change in quantity demanded (Qd) and the percentage change in price (P).

Elasticity of Demand =

Percentage change in quantity demanded

Percentage change in price

Elastic Demand = the quantity demanded changes by a greater percentage than the percentage change in price

Quantity demanded (Qd) 15% and price (P) 10%

1510 = 1.5 greater than 1 = Elastic demand


22

22

Elasticity of Demand (continued)

Inelastic Demand = the quantity demanded changes by a smaller percentage than the percentage change in price


510 = .5 less than 1 = Inelastic demand

Unit-elastic Demand = the quantity demanded changes by the same percentage as the percentage change in price


1010 = equal to 1 = Unit-elastic demand


23

23

Determinants of Elasticity of Demand

Determinants Elastic Inelastic

Number of substitutes many few

Luxuries or necessities luxury necessity

Percentage of income smaller larger

Time to delay a purchase more less


24

24

Elasticity and Total Revenue

Total Revenue (TR) = the amount of money the seller receives for selling a good

Item costs $1.00 each and you sell 100. Total revenue is $100.$1.00 x 100 = $100 TR

Elastic demand + Price rise = Total revenue decreases$1.00 ea x 100 units sold = $100.00 TR$1.10 ea x 85 units sold = $93.50 TR

Elastic demand + Price decline = Total revenue increases$1.00 ea x 100 units sold = $100.00 TR$ .90 ea x 120 units sold = $108.00 TR


25

25

Unit-elastic demand + Price rise = Total revenue the same$1.00 ea x 100 units sold = $100.00 TR$2.00 ea x 50 units sold = $100.00 TR

Unit-elastic demand + Price decline = Total revenue the same$1.00 ea x 100 units sold = $100.00 TR$ .50 ea x 200 units sold = $100.00 TR

Inelastic demand + Price rise = Total revenue increases$1.00 ea x 100 units sold = $100.00 TR$1.10 ea x 95 units sold = $104.50 TR

Inelastic demand + Price decline = Total revenue decreases$1.00 ea x 100 units sold = $100.00 TR$ .90 ea x 90 units sold = $94.50 TR


26

26

Quick CheckPrice

Quantity demanded

Satisfaction/Usefulness

Additional satisfaction

Buy and sell goods

P = 1

Qd = 2

P then Qd goes 3

P then Qd goes4

Utility = 5

Marginal utility6

Market 7


27

27

Quick Check (continued)Good

Service

Diminishing marginal utility

inverse/opposite

Demand schedule

Demand curve

Tangible product 8

Intangible product9

Chart of demand 10

Graph of demand11

Law of decreasing satisfaction

12

P and Qd have a(n) relationship

13


28

28

Quick Check (continued)vertical

horizontal

Willingness and ability to buy

As P then Qd As P then Qd

End of Chapter 3

End of Chapter 3

Price is on the axis

14

Qd is on the axis

15

Demand 16

Law of demand17

demand notes

Education

demand demand d

law of demand

demand increases demand

demand schedule

demand curves

chapter demand

units demand curve

price p quantity