lec 4 part 1 Introduction to Demand and Determinants

Introduction to Demand

Primary Concept: Demand focuses on the behavior of buyers and consumers in the marketplace.
Instructional Method: Mr. Clifford explains demand using the analogy and physical act of consuming a gallon of milk.

The Law of Demand

Definition: The Law of Demand states that there is an inverse relationship between the price of a product and the quantity demanded ( $QD$ ) of that product.
Core Mechanism: - When the price of a good decreases ( $P \downarrow$ ), the quantity demanded increases ( $QD \uparrow$ ). - Conversely, when the price of a good increases ( $P \uparrow$ ), the quantity demanded decreases ( $QD \downarrow$ ).
The Demand Schedule: This is a table tracking the relationship between price and quantity demanded. According to the transcript's example, as the price levels descend through $4$ , $3$ , $2$ , and $1$ , the quantity demanded increases at each step.
The Demand Curve: When the points from a demand schedule are plotted on a graph, they form a downward sloping curve. This slope graphically represents the Law of Demand.

Three Reasons for the Law of Demand

There are three distinct economic reasons why the demand curve is downward sloping:

The Substitution Effect: - Definition: If the price for a product like milk decreases, it becomes relatively cheaper compared to other products. Consumers will move away from those now relatively more expensive items to purchase the cheaper product. - Example: Instead of buying juice, a consumer will turn around and purchase more milk because its price has dropped. - Inverse: If the price of milk increases, the quantity demanded for milk decreases because consumers will seek out and move to a substitute product.
The Income Effect: - Definition: When the price of a good decreases, the purchasing power of the consumer increases. This means each dollar the consumer has can buy more of the product than before. - Example: If a gallon of milk costs only $1$ , a consumer's purchasing power has increased, enabling them to buy more milk with their existing income. - Inverse: If the price of milk rises, purchasing power decreases because each dollar retrieves less milk, leading to a decrease in the amount purchased.
The Law of Diminishing Marginal Utility: - Component Definitions: - Utility: Satisfaction. - Marginal: Additional. - Definition: The Law of Diminishing Marginal Utility states that as a person consumes more of a specific product (like milk), the additional satisfaction they derive from each successive unit will eventually decrease. - Practical Example: The very first sip of cold milk is highly refreshing and provides high utility. As consumption continues, the level of satisfaction from each subsequent sip or gallon drops significantly. - Economic Connection: To incentivize a consumer to buy more quantity of a product from which they are gaining less and less additional satisfaction, the price of that product must be lowered.

Shifts in Demand vs. Movement Along the Curve

Movement Along the Curve: - Cause: A change in the price of the product itself. - Terminology: This is strictly referred to as a "change in quantity demanded." - Visualization: Traveling from Point A to Point B on a single curve as price fluctuates.
Shift of the Entire Curve: - Cause: A change in something other than the price of the product. - Terminology: This is referred to as a "change in demand." - Decrease in Demand: The entire curve shifts to the left ( $Shift \leftarrow$ ). At every possible price, people are now buying less (e.g., a news report claiming milk causes baldness). - Increase in Demand: The entire curve shifts to the right ( $Shift \rightarrow$ ). At every possible price, people are now willing to buy more.

The Five Shifters (Determinants) of Demand

These five factors cause the entire demand curve to shift:

1. Tastes and Preferences: - Example: A news report stating that children who drink milk before school perform better and are smarter would increase demand, shifting the curve to the right.
2. Number of Consumers: - This relates to the size of the market. If a sudden influx of new customers moves into a town, the demand for milk in that area will increase.
3. Price of Related Goods (Substitutes and Complements): - Substitutes: Products like almond milk and cow's milk. If the price of almond milk increases, the demand for cow's milk increases. If the price of almond milk decreases, people switch away from cow's milk, causing its demand to fall. - Complements: Products used together, such as cereal and milk. If the price of cereal falls (making it cheaper to eat), the demand for its complement, milk, will increase.
4. Income: - Normal Goods: For most goods, an increase in income leads to an increase in demand, and a decrease in income leads to a decrease in demand. - Inferior Goods: In contrast, for inferior goods, an increase in income leads to a decrease in demand, while a decrease in income leads to an increase in demand.
5. Change in Expectations: - Price Expectations: If consumers expect the price of milk to decrease next week, they will buy less today (demand decreases today). If they expect the price to increase next week, they will buy a significantly larger amount today (demand increases today).

Critical Distinction: Price vs. Demand

Note on Price Changes: When the price of a product goes down, the demand for that product DOES NOT change; the demand stays exactly the same. Only the "Quantity Demanded" ( $QD$ ) changes.
Key Summary Rules: - 1. The only thing that changes Quantity Demanded is a change in the product's price. - 2. The only thing that changes Demand is one of the five shifters listed above.
Graphical Example: - Transition from Point A to Point B: Price drops from $3$ to $2$ , quantity increases from $10$ to $20$ . This is a "change in quantity demanded." - Transition from Point A to Point C: Price remains at $3$ , but people decide to buy more units regardless. This is a "change in demand" caused by a shifter, such as tastes and preferences.