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

     1. Tastes And Preferences   2. Number Of Consumers   3. 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   4. 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   5. 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

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