Demand Notes

Demand

Introduction

• Demand involves consumers' willingness and ability to purchase an item at a given price, assuming ceteris paribus (all other things being equal).
  • Willingness: Buyers must desire the item.
  • Ability: Buyers must possess the financial resources to afford the item.
• Demand represents a behavior rather than a numerical amount.

The Law of Demand

• The price of an item is a key determinant of its quantity demanded.
• There exists an inverse relationship between price and quantity demanded.
  • Lower prices lead to higher quantities demanded (when goods/services are cheap, people tend to buy more).
  • Higher prices lead to lower quantities demanded (when goods/services are expensive, people tend to buy less).
• This inverse relationship is referred to as the Law of Demand.

Reasons Why the Law of Demand Exists

1. Income Effect
   • Expensive items reduce purchasing power (when things are expensive, money buys less).
   • Cheap items increase purchasing power (when things are cheap, money buys more).
2. Substitution Effect
   • When the price of a good increases, consumers switch to relatively cheaper substitutes (e.g., if apples are expensive, and pears are cheaper, consumers buy more pears).
3. Diminishing Marginal Utility
   • Each additional unit of a good provides less satisfaction (marginal utility) than the previous unit.
   • Consumers are only willing to buy more if the price decreases.

Demand Schedule

• A demand schedule is a table showing the relationship between the price of a good and the quantity demanded.

  • Example:
    • At a price of 15.00, the quantity demanded is 0.
    • At a price of 10.00, the quantity demanded is 1,000.
    • At a price of 8.00, the quantity demanded is 2,000.
    • At a price of 6.00, the quantity demanded is 3,000.

Demand Curve

• The demand curve is a graphical representation of the demand schedule, plotting price against quantity.

Change in Quantity Demanded vs. Change in Demand

• Change in Quantity Demanded
  • Represents a movement along the demand curve.
  • Caused only by a change in the price of the product.

Example

• An increase in price from $2.00 to$4.00 causes a movement along the demand curve from point C to point A.

  • Change in Demand
  • Represents a shift of the entire demand curve (either to the left or right).
  • Caused by a change in a determinant other than the price.

Changes in Demand

• Increase in Demand
  • More quantity demanded at all prices.
  • The demand curve shifts to the right.
• Decrease in Demand
  • Less quantity demanded at all prices.
  • The demand curve shifts to the left.
• Price itself does not shift the demand curve. It only causes movement along the curve (change in quantity demanded).

Determinants of Demand (T.R.I.P.E.)

• Factors that cause the entire demand curve to shift:
  • Tastes and Preferences
  • Related Goods (Complements & Substitutes)
  • Income
  • Population
  • Expectations of future price changes

Tastes and Preferences

• Influenced by advertising, trends, health considerations, and weather.
  • Example:
    • Increased demand for dark chocolate due to research showing health benefits.
    • Decreased demand for spinach due to E. coli concerns.

Related Goods

• Complements: Goods/services used in conjunction with each other.
  • Example:
    • An increase in gasoline prices decreases the demand for Hummers (complement).
    • A decrease in movie ticket prices increases the demand for theater popcorn (complement).
• Substitutes: Goods/services used in place of each other.
  • Example:
    • An increase in gasoline prices increases the demand for ethanol (substitute).
    • An increase in movie ticket prices increases the demand for DVDs (substitute).

Income of Consumers

• Normal Goods/Services
  • Demand increases when income increases (e.g., steak).
  • Demand decreases when income decreases.
• Inferior Goods/Services
  • Demand decreases when income increases (e.g., Top Ramen).
  • Demand increases when income decreases.

Population

• More population leads to more demand.
  • Example: As America’s population grows, so does the demand for housing.
• Less population leads to less demand.
  • Example: If students drop a class, the demand for that class decreases.

Expectations of Future Price Changes

• If consumers expect prices to rise in the future, current demand increases.
  • Example: Prior to a hurricane, consumers expect higher fuel prices, leading to increased demand now.
• If consumers expect prices to fall in the future, current demand decreases.
  • Example: Potential home buyers might wait, expecting prices to fall further.