Demand

• Indicates how much product consumers are both willing and able to buy at each possible price during a given period, with others remaining constant.

The Demand Curve

The demand curve is the demand schedule plotted on a graph. It allows you to see the more “in-between” prices on the demand schedule.

Shifting the demand curve

Law of Demand

Definition

• The quantity demanded varies inversely with price; other things are constant. Thus, the higher the price, the smaller the quantity demanded; and vise versa.

Substitution effect

• The change in the relative price (the price of one good relative to the prices of other goods) causes the substitution effect.

• If all prices changed by the same margin, there would be no substitution effect.

• For example; if it were a hot day and you wanted a cold glass of orange juice, but suddenly! the orange juice prices jumped up, then you would rather buy another type of juice like apple or pineapple juice if means it will save you more money by substituting the kind of juice your buying.

Income effect

• Money Income: The number of dollars you receive per period.

• Real Income: measure in terms of how many goods and services you can buy.

• For example; if your money income increases while the prices of goods and services remain constant, your real income also increases, allowing you to purchase more items than before.

Diminishing marginal utility

• Marginal utility: additional satisfaction you derive from each item

• Law of marginal utility: the satisfaction you derive from each additional item consumed decreases as your consumption increases.

• For example; consuming one slice of pizza may provide high satisfaction, but the second slice will likely bring less satisfaction, and by the time you reach the third or fourth slice, the enjoyment may significantly diminish.

Demand schedule

A chart that shows the price and the quantity demanded.

The difference between Demand and Quantity Demanded

Quantity demanded is at the individual/specific price while demand is the all-over price

Demand elasticity

Determinants of Demand elasticity

• Availability of substitutes: The greater the availability of substitutes for a good, the greater the goods elasticity of demand.

• Share of consumer’s budget spent on the good: Increase in prices reduced the demand because people are not both willing and able to purchase at higher prices

• A matter of time: The longer the adjustment period, the greater the consumer’s ability to substitute

• Some elasticity estimates: The elasticity of demand is greater in the long run because consumers have more time to adjust.

Other Determinants of Demand

• Consumer Income