The economic way of thinking - 3. Substitutes everywhere, the concept of demand

What is the relationship between the claim that people face "trade-offs" versus the claim that people have genuine "needs"?

• The economic way of thinking doesn't deny that real people have real needs, but it does suggest that these statements can be misleading.

• As the sacrifice or cost increases, people tend to search for substitutes.

What does the Theory of Marginal Utility state?

• Marginal: on or at the edge.

• A marginal benefit or cost is an additional benefit or cost.

• What do I expect to gain? What do I expect to sacrifice?

• Just about anything could be more valuable than anything else under appropriate circumstances.

Demand

A concept that relates the amounts people want to obtain to the sacrifices they must make to obtain these amounts.

Consume

Means a person tries to acquire and use a specific amount of a good for a variety of different purposes.

Quantity demanded

The amount that consumers plan to purchase at a given price.

Demand curve

illustrates the amount of a good that consumers plan to purchase at any given price.

What is the difference between demand and quantity demanded?

• Demand is a curve. Changes to it affect the placement of the curve, it can shift.

• Quantity demanded is a specific amount that consumers plan to buy at a specific price. Changes to it causes us to move along the curve.

What do people do when faced with higher prices?

• When faced with higher prices, people tend to conserve a resource, to seek out substitutes.

• Consumers make marginal adjustments to changes in the price of a good. They don't engage in all-or-nothing trade-offs.

• They seek out more economically efficient ways of accomplishing their goals.

• It takes time to find substitutes.

Law of demand

Negative relationship between price and quantity demanded, other things being constant.

What factors cause a shift in the demand curve? (6 factors)

1. A change in the number of consumers

2. A change in consumer tastes and preferences.

3. A change in income.

4. A change in the price of a substitute good.

5. A change in the price of a complementary good.

6. A change in the expected price of a good.

Explain how a change in the number of consumers affects demand.

Explain how a change in consumer tastes and preferences affects demand.

Explain how a change in income affects demand.

Explain how a change in the price of a substitute good affects demand

• A rise in the price of a given good will tend to increase the demand for the substitute good.

• The price of a single good has meaning only when considered against the prices of the vast array of other goods.

• Everything depends on everything else

Explain how a change in the price of a complementary good affects demand.

Normal good

Type of good in which income and demand move in the same direction.

Complementary good

A product or service that is used together with another product or service, such that the demand for one is directly linked to the demand for the other.

Substitute good

A product or service that can be used as a replacement for another product or service, as it provides a similar function or satisfies a similar need.

Inflation

• An increase in the average money price of goods.

• Muddies the price signals.

• All money prices do not change in equal proportion as a result of inflation, but they do tend to move together.

Elasticity

Responsiveness.

Percent change in the quantity demanded by 1% change in the price.