Demand Curve and Price-Quantity Relationship

Factors Affecting Shoe Purchases

  • Price is a factor but not the only one.
  • Other factors include:
    • Taste or preference (style)
    • Comfort
    • Quality
    • Occasion
    • Income
      • Higher income leads to less price sensitivity.

Investigating the Relationship Between Price and Quantity

  • Focus on the relationship between price and quantity, holding other factors constant (taste, comfort, quality, occasion, income).
  • Examine how the quantity of shoes purchased changes when the price changes, keeping all other variables constant.

Definition of Inverse Relationship

  • An inverse relationship means when one variable goes up, the other goes down, and vice versa.
  • Common sense tells us that when something becomes more expensive, we buy less of it.

Reasons for the Inverse Relationship

  • Substitution Effect:
    • When something becomes more expensive, people look for cheaper alternatives.
    • Example: Switching to a cheaper hairdresser when the original one raises prices.
  • Income Effect:
    • When something becomes more expensive, people can afford to buy less of it.
    • Real-world example: A friend recalls how, decades ago, a single income could support a family and a house in a good suburb, whereas now, despite income increases, affordability is lower.
  • Law of Diminishing Marginal Returns:
    • Demonstrated using the example of eating pizza.
    • Satisfaction from each additional slice of pizza decreases as you eat more.
    • The willingness to spend money on each additional slice decreases as well.

Law of Diminishing Marginal Return Described Graphically

  • Vertical axis: Satisfaction of eating each slice of pizza.
  • Horizontal axis: Number of pizza slices eaten.
  • The first slice provides high satisfaction, but as you eat more, satisfaction decreases.
  • Satisfaction{slice1} > Satisfaction{slice2} > Satisfaction{slice3}
  • Eventually, you become indifferent or even averse to eating more.
  • Marginal means additional gain or satisfaction from each additional slice.

Inverse Relationship Expressed by a Downward Sloping Curve

  • An inverse relationship can be expressed by a downward sloping curve.
  • Vertical axis: Price (P)
  • Horizontal axis: Quantity (Q)
  • Label the demand curve as 'D'.

Labeling Prices and Quantities on the Demand Curve

  • Label two prices (P1, P2) on the vertical axis (e.g., $80 and $60 for a haircut).
  • Find the corresponding quantities (Q1, Q2) on the horizontal axis based on the demand curve.
  • The demand curve shows the relationship between price and quantity.

Using the Demand Curve to Find Price and Quantity

  • Every point on the demand curve gives a pair of data (price and quantity).
  • If you know the price, you can use the demand curve to find the corresponding quantity, and vice versa.
  • Example: If Tim Tams are $6 per pack, you might buy one pack per month; if they are half price, you might buy two, three, or four.