Copy of 1. Demand

Unit 2: Microeconomics

Big Question

What influences the decisions of consumers?

Learning Objectives

• Define the law of demand thoroughly, including its implications and real-world applications.

• Illustrate and explain demand curves, including factors that cause shifts in these curves.

• Provide examples of consumer responses to price changes of both substitutes and complements, illustrating this with real-world scenarios.

• Differentiate between normal goods and inferior goods, with a broader scope of examples and implications on consumer behavior.

• Distinguish between change in quantity demanded and change in demand, providing detailed explanations and examples for each.

• Identify and apply the five shifters (determinants) of demand with context-specific examples and cases.

Demand Overview

Definition of Demand

Demand refers to the various quantities of goods that consumers are both willing and able to purchase at different price points. It's important to distinguish between the willingness to buy and the actual capacity to purchase. For instance, simply having the means to purchase diapers does not equate to demand unless there is a willingness to do so based on preferences, necessity, or external factors.

Law of Demand

The law of demand articulates an inverse relationship between the price of a good and the quantity demanded. As the price of a good rises, the quantity demanded typically decreases, and conversely, if prices drop, the quantity demanded increases. This law holds true under typical market conditions and stands as a fundamental principle of microeconomics, illustrating consumer behavior regarding price sensitivity.

Demand Curves

Characteristics of Demand Curves

A demand curve visually represents a demand schedule on a graph, typically displaying a downward slope that signifies the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis). The demand curve operates under the assumption of ceteris paribus, meaning all other external factors are held constant. This simplification allows economists to isolate the effects of price changes on quantity demanded.

Graphing Demand

Key elements such as the price of milk versus quantity demanded should be clearly indicated on the graph. Utilizing visual aids not only enhances comprehension but also fosters engagement in understanding how demand curves function.

Changes in Demand

Shifts in Demand

Shifts in demand can occur when external factors change, causing the demand for a good to increase or decrease at any given price. Such shifts are driven by significant factors like changes in consumer preferences, technological innovations, and changes in demographic trends. For example, if milk gains popularity as a health food due to influencing scientific studies, demand may shift outward, leading to a higher quantity demanded at existing prices.

Factors Affecting Demand

Five Shifters (Determinants) of Demand:

1. Tastes and Preferences: Changes in consumer tastes can lead to dramatic shifts in demand. For instance, an increase in health awareness can spike the demand for organic fruits and vegetables.

2. Number of Consumers: An increase in the number of consumers, such as a growing population or an influx of tourists, directly leads to increased demand for goods and services.

3. Price of Related Goods: This includes substitutes and complements. A rise in the price of a substitute typically leads to increased demand for the product in question, while a decrease in the price of a complement typically increases demand for the original product.

4. Income: Variations in consumer income levels often impact demand, particularly distinguishing between normal goods (demand rises as income increases) and inferior goods (demand decreases as income rises).

5. Future Expectations: Anticipated future supply and economic conditions can affect present demand. For example, if consumers expect prices to rise in the future, they may increase current demand to avoid paying more.

Important Note

It is crucial to recognize that a change in price leads to movement along the demand curve rather than a shift of the entire curve.

Price of Related Goods

Complements

Complementary goods are those used in conjunction; for instance, a decrease in the price of hot dogs may prompt an increase in the demand for hot dog buns, as consumers are likely to purchase both items together.

Substitutes

Substitutes are interchangeable goods; if the price of one good falls, the demand for its substitute typically decreases. For example, a significant price drop in Pepsi could result in a decline in the demand for Coke as consumers opt for the cheaper alternative.

Normal vs. Inferior Goods

Normal Goods

Normal goods see an increase in demand as consumer income rises. Common examples include luxury items such as high-end cars, gourmet seafood, and valuable jewelry.

Inferior Goods

Inferior goods experience a decrease in demand with rises in consumer income. Items such as used cars or inexpensive food items, like Top Ramen, are examples where demand falls as consumers opt for higher quality alternatives when they can afford to do so.

Practical Applications in Economics

Practice Scenarios

Incorporate real-world scenarios involving shifts in demand to engage students in practical applications; scenarios may include population growth, changes in disposable income, or significant price changes affecting substitutes and complements.

Recognizing Changes in Demand vs. Quantity Demanded

Emphasizing the distinction between changes in quantity demanded (movement along the demand curve due to price changes) and shifts in demand (entire demand curve adjustment related to external factors) is pivotal for in-depth student comprehension.

Example Problems

• Assess the factors contributing to a decrease in the demand for milk.

• Analyze how changes in the price of milk affect the quantity demanded in various scenarios.

In-Class Engagement

Facilitate student understanding through comprehensive practice questions and discussions centered on demand-related concepts, with a strong focus on distinguishing between the nuances of changes in demand versus changes in quantity demanded.