(6) Demand and Supply Explained- Macro Topic 1.4 (Micro Topic 2.1)

Introduction to Demand

Welcome Message: Mr. Clifford introduces the topic of demand in economics, emphasizing its significance in understanding consumer behavior and market dynamics.

Understanding Demand

Demand is primarily about buyers and consumers; Mr. Clifford explains this fundamental concept of economics while drinking milk, using it as a relatable example. Demand reflects consumers' willingness and ability to purchase goods and services at various price points.

Law of Demand

Definition:

The law of demand states an inverse relationship between price and quantity demanded, an essential principle in economics:

• If price decreases, quantity demanded increases. This means that lower prices make goods more accessible, encouraging consumers to buy more.

• If price increases, quantity demanded decreases. Higher prices discourage purchases as consumers may seek alternatives or forego the purchase altogether.

Demand Schedule:

A demand schedule is a table that demonstrates how lower prices (e.g., $4, $3, $2, $1) correlate with increased quantity demanded. For example, at $1, consumers may demand significantly more milk than at $4.

Visual Representation:

The demand curve, a fundamental tool in economics, is depicted as a downward sloping graph representing the law of demand visually.

Reasons for Downward Sloping Demand Curve

Substitution Effect:

The substitution effect occurs when a lower price for milk leads consumers to buy more milk instead of relatively expensive substitutes like soy or almond milk. Conversely, a higher price for milk results in decreased purchases, as consumers switch to cheaper alternatives.

Income Effect:

A drop in the price of milk effectively increases consumers' purchasing power. With more buying power, they demand more quantity demanded of milk. Conversely, if prices rise, purchasing power diminishes, leading to lower quantity demanded.

Law of Diminishing Marginal Utility:

According to this principle, satisfaction (utility) decreases with each additional unit consumed. For instance, the first sip of milk might bring great satisfaction, but as consumption continues, the satisfaction from subsequent sips diminishes. This principle explains why producers often need to lower prices to increase sales: consumers will only buy more if they perceive good value.

Changes Along the Demand Curve vs. Shifts in Demand

Price Change Effects:

A change in price causes movement along the demand curve, illustrating changes in quantity demanded without altering the demand itself.

Shifts in Demand:

Demand shifts occur when factors other than price influence consumer demand, causing the entire curve to move left (indicating a decrease in demand) or right (indicating an increase in demand). For example, a negative study finding about milk could shift the demand curve left, meaning at all price points, less milk would be demanded.

Shifters of Demand (Determinants)

1. Tastes and Preferences: Changes in consumer preferences due to new studies, trends, or advertising (e.g., studies showing milk's benefits) can shift the demand curve to the right.

2. Number of Consumers: An increase in the population or new customer segments entering the market can lead to heightened demand. For example, a growing health-conscious population may increase demand for organic milk.

3. Price of Related Goods:

   • Substitutes: Higher prices for almond milk may lead to increased demand for cow's milk as consumers look for affordable options.

   • Complements: Lower prices for cereal could lead to higher demand for milk, as they are often purchased together.

4. Income:

   • Normal Goods: Higher income typically correlates with increased demand for normal goods, including higher-quality milk.

   • Inferior Goods: Demand for inferior goods, such as less expensive milk brands, typically decreases with rising consumer income.

5. Change in Expectations: If consumers expect lower prices for milk in the future, they may decrease current demand. Conversely, if they anticipate price increases, they will be more likely to increase current demand to avoid paying more later.

Change in Quantity Demanded vs. Change in Demand

Graphical Representation:

Points A, B, C on the demand graph illustrate the concepts clearly.

• Change in Quantity Demanded: Movement along the curve from A to B occurs when the price of milk decreases from $3 to $2, leading to an increased quantity demanded.

• Change in Demand: The entire curve shifts from A to C without a change in price. This occurs due to the five determinants influencing consumers to buy more of the same product at the unchanged price.

Key Takeaway

Impact of Price on Demand: When the price decreases, demand itself remains unchanged; only quantity demanded changes due to price variations. In contrast, demand itself can change due to external factors affecting the five determinants, leading to shifts in the entire demand curve.