Econ Chapter 3 Demand

Demand Overview

Allocation Systems

• Market System:

  • Buyers and sellers determine:

    • What to produce

    • How to produce

    • For whom to produce

What is a Market?

• Definition: Any place where buyers and sellers come together with potential for exchange.

• Characteristics:

  • Doesn't have to be a physical location.

  • Types of markets:

    • Local

    • Regional

    • National

    • Worldwide

Trading Mechanisms

• Money facilitates exchange in the market.

• Barter System:

  • Requires double coincidence of wants.

  • High transaction costs involved.

What is Demand?

• Definition:

  • Amount of a product people are willing and able to purchase at every possible price.

  • Demand Curve: Represents the entire range of demand at various prices.

• Quantity Demanded:

  • Specific quantity willing to buy at a specific price.

Law of Demand

• Principle: As price increases, quantity demanded decreases, assuming ceteris paribus (nothing else changes).

• Ceteris Paribus:

  • Latin for "all else being equal".

Law of Demand Example

• Implication: People purchase more when the price is lower.

• Questions to consider:

  • Do you agree with the law of demand?

  • Examples in real life?

Demand Schedule

• Definition: A list of prices and corresponding quantities demanded of a particular good or service.

• Example: Demand Schedule for T-shirts in Seal Beach

  • Price (per shirt) | Quantity (shirts/week)

    • $10 | 65

    • $12 | 60

    • $14 | 50

    • $16 | 40

    • $18 | 25

Demand Curve

• Graphical representation of the demand schedule.

• Axes:

  • Price on vertical axis

  • Quantity on horizontal axis

• Characteristics:

  • Downward-sloping

  • Indicates an inverse relationship between price and quantity demanded (Law of Demand).

• Market Demand Curve:

  • Aggregated from all individual demand curves.

Change in Quantity Demanded

• Concept: Movement along the demand curve due to price change.

• Example: Effect of price change on T-shirt demand in Seal Beach.

Determinants of Demand

• Non-price determinants shift the demand curve.

• Key Determinants:

  • Number of Buyers

  • Other Goods (Substitutes/Complements)

  • Tastes

  • Income

  • Expectations

• Mnemonic: "NO TIE"

Income and Tastes

• Income affects consumer purchasing power.

  • Normal Good: Demand increases with income.

  • Inferior Good: Demand decreases with income.

• Tastes: Influences consumer preferences.

  • Companies may influence tastes through marketing.

Substitutes and Complements

Substitutes

• Definition: Goods that can replace each other.

• Examples:

  • Netflix and movie tickets

  • Crest vs. Colgate

  • Ford and Chevy

• Impact: Demand for one good can increase if the price of a substitute increases.

Complements

• Definition: Goods used together.

• Examples:

  • Cameras and memory cards

  • Shoes and socks

• Impact: Demand for one good can decrease if the price of a complement increases.

Expectations

• Consumer expectations about future prices and income events can affect current demand.

• Example: Anticipating rising gas prices may encourage current purchases.

Number of Buyers

• Definition: Market demand equals the sum of all individual demands.

• Impact:

  • More buyers increase demand.

  • Fewer buyers decrease demand.

• Real-life examples: Effects of major events (e.g., concerts, sports tournaments) on local demand.

Change in Demand

• Triggered by any change in non-price determinants.

• Result: A new demand curve is drawn, indicating a shift.

Increase in Demand

• Shift right in the demand curve.

• Causes:

  • Increase in income

  • Increase in number of buyers

  • Increase in tastes

  • Increase in price of a substitute

  • Decrease in price of a complement.

Decrease in Demand

• Shift left in the demand curve.

• Causes:

  • Decrease in income

  • Decrease in price of a substitute

  • Increase in price of a complement

  • Anticipated price declines.

Review Questions

• What is the law of demand?

• What is a demand schedule?

• Describe a demand curve.

• What is market demand?

• What occurs when one of the determinants of market demand changes?

Summary of Key Concepts

• Changes in demand refer to shifts in the demand curve due to non-price factors.

• Changes in quantity demanded reflect movements along the demand curve due to price changes.