2.1: Demand
Demand Defined
- Demand: The Different Quantities Of Goods That Consumers Are willing And able To Buy At Different Prices
- Eg. You Are able To Purchase Diapers, But If You Aren’t willing To Buy, There Is No Demand.
- Law Of Demand: There Is An Inverse Relationship Between Price And Quantity Demanded
- Result Of Three Separate Behavior Patterns That Overlap
- Substitution Effect: If The Price Goes Up For A Product, Consumers Buy Less Of That Product And More Of Another Substitute Product (and Vise-versa)
- Income Effect: If The Price Goes Down For A Product, The Purchasing Power Increases For Customers, Allowing Them To Purchase More
- Law Of Diminishing Marginal Utility: As You Consume Anything, The Additional Satisfaction That You Receive Will Eventually Start To Decrease
- Utility = Satisfaction → We Buy Goods To Get Utility From Them
- The More You Buy Of Any Good, The Less Satisfaction You Get From Each New Unit Consumed
Graphing Demand
- Demand Curve: A Graphical Representation Of A Demand Schedule
- Downward Sloping, Showing The Inverse Relationship Between Price (on The Y-axis) And Quantity Demanded (on The X-axis)
- When Reading A Demand Curve, Assume That All Outside Factors Such As Income Are Held Constant → “ceteris Paribus”
Shifts In Demand
Ceteris Paribus: All Other Things Held Constant
- When This Assumption Is Dropped, Movement No Longer Occurs Along The Demand Curve; Rather, The Entire Demand Curve Shifts
- A Shift Means That At The Same Prices, More People Are Willing And Able To Purchase That Good
- This Is A Change In Demand, Not A Change In Quantity Demanded → Price Doesn’t Shift The Curve!!
What Causes Shifts In Demand? 5 Shifters [determinants] Of Demand
- Tastes And Preferences
- Number Of Consumers
- Price Of Related Goods
- The Demand Curve Of One Good Can Be Effected By A Change In The Price Of Another Related Good
- substitutes: Goods Used In Place Of One Another
- If The Price Of One Increases, The Demand For The Other Will Increase (or Vise Versa)
- Eg. If The Price Of Pepsi Falls, Demand For Coke Will Fall
- complements: Two Goods That Are Bought And Used Together
- If The Price Of One Increases, The Demand For The Other Will Fall (or Vise Versa)
- Eg. If The Price Of Hot Dogs Falls, Demand For Hot Dog Buns Will Increase
- substitutes: Goods Used In Place Of One Another
- Income
- The Incomes Of Consumers Change The Demand, But How Depends On The Type Of Good
- Normal Goods — As Income Increases, Demand Increases +v/v
- Eg. Luxury Cars, Seafood, Jewelry, Homes
- Inferior Goods — As Income Increases, Demand Falls +v/v
- Eg. Top Ramen, Used Cars
- Normal Goods — As Income Increases, Demand Increases +v/v
- Future Expectations
Changes In Price Don’t Shift The Curve, They Only Cause Movement Along The Curve.
Price Elasticity Of Demand
- Law Of Demand — Consumers Will Buy More When Prices Go Down And Less When Prices Go Up
- elasticity: The Concept Of Determining How Much More/less
- price Elasticity Of Demand (PED): Measurement Of How Sensitive Quantity Demanded Is To A Change In Price
- Knowing How Consumers Will Respond To A Change In Price Is Extremely Useful To Firms
- Helps Decide What To Charge, When/if To Have Sales
- Helps Determine How Many Substitutes Are In The Market
- Used By Government To Decide When & How Much To Tax
- Elasticity Varies Along A Linear Demand Curve; Elasticity Is Not Slope
Elastic And Inelastic Demand
Elastic Demand
- Elastic Demand: When A Quantity Is Sensitive To A Change In Price
- If Price Increases, Quantity Demanded Will Fall A Lot
- If Price Decreases, Quantity Demanded Will Rise A Lot
- The Amount People Buy Is Sensitive To Changes In Price
- Elastic Demand Curve Is Flat
- General Characteristics Of Elastic Goods
- Many Substitutes
- Luxury Goods
- Large Portion Of Income
- Plenty Of Time To Decide On Purchases
- Elasticity Coefficient Greater Than One
Inelastic Demand
- Inelastic Demand: When A Quantity Is Insensitive To A Change In Price
- If Price Increases, Quantity Demanded Will Fall A Little
- If Price Decreases, Quantity Demanded Will Rise A Little
- People Will Continue To Buy Regardless Of Changes In Price
- Inelastic Demand Curve Is Steep
- General Characteristics Of Inelastic Goods
- Few Substitutes
- Necessities
- Small Portion Of Income
- Required Immediately Rather Than Later
- Elasticity Coefficient Less Than One
Calculating Percent Change
- % Change = [(new #-old #)/(old #)] X 100
Total Revenue Test
- Total Revenue Test: Test That Uses Elasticity To Show How Changes In Price Will Affect Total Revenue (TR)
- Elastic Demand — Price Increase = TR Decrease +v/v
- Inelastic Demand — Price Increase = TR Increase +v/v
- Unit Elastic — Price Changes, TR Remains Constant