What is Demand?• Demand for a product is more than having the desire to own an item. Demand includes the ability and willingness to pay for it.• Microeconomics is the part of economic theory that deals with behavior and decision making by individuals and firms.
An Introduction to Demand (cont.)• Demand is central to a market economy.• Demand involves three variables: – Price – Quantity of a specific product – At a given point in time The Demand for Compact Digital Discs
An Introduction to Demand (cont.)• A demand schedule shows the various quantities demanded of a good at all prices that might prevail in the market at a given time.• A demand schedule shown graphically is a demand curve. The Demand for Compact Digital Discs
An Introduction to Demand (cont.)• Change in Quantity Demanded – Movement along the demand curve. – Caused by a change in the price of the product.
An Introduction to Demand (cont.)Price of Ice-CreamCones A tax that raises the B price of ice-cream $2.0 cones results in a 0 movement along the demand curve. 1.00 A 0 D 4 8 Quantity of Ice-Cream Cones
The Law of Demand There is an inverse relationship between the price of an item and the quantity demanded.
The Law of Demand (cont.)• Higher prices are associated with smaller amounts demanded on most goods or services we buy. This is the Law of Demand. – Quantity demanded varies inversely with its price. All other things being equal: ↑P ►↓QD or ↓P ►↑QD• The market demand curve shows quantities demanded by everyone in the market who is interested in the product/service. Individual and Market Demand Curves
Law of Demand The Law of Demand states thatwhen the price goes up, quantity demanded goesdown. When the price goes down, quantitydemanded goes up.
Demand and Marginal Utility As we buy more of an item, we get less satisfaction from each additional purchase.
Demand and Marginal Utility (cont.)• Utility is the amount of product satisfaction or usefulness one receives from its use.• Marginal utility explains much about demand.• As we use more of a product, we encounter diminishing marginal utility.
Change in the Quantity Demanded Only a change in price can cause a change in quantity demanded.
Change in the Quantity Demanded (cont.)• When only the price changes and all else remains constant, there is a change in the quantity demanded. – Income effect – Substitution effect• A change in quantity demanded is a movement along the original demand curve. Change in the Quantity Demanded
Change in Demand Several factors can cause the demand curve to shift.
Change in Demand (cont.)• Factors other than price can cause a change in demand.• A change in demand results in an entirely new demand curve. Change in Demand
Change in Demand (cont.)• Factors for demand changes – Consumer income – Consumer tastes – Price of related goods • Substitutes • Complements – Expectations – Number of consumers Change in Demand
Change in Demand When a change in demandoccurs, people want to buy different amounts of aproduct at the same price. A change in demand canhappen for several reasons.
Change in Demand (cont.)• Change in Demand – A shift in the demand curve, either to the left or right. – Caused by any change that alters the quantity demanded at every price.
Elasticity of Demand• An important cause-and-effect relationship in economics is elasticity. Profiles in Economics: Oprah Winfrey
Demand Elasticity When the price of an item changes, the change in quantity demanded can vary a little or a lot.
Demand Elasticity (cont.)• Consumers react to changes in price by changing the quantity demanded. The size of the reaction is demand elasticity.• Demand can be – Elastic—fresh produce – Inelastic—table salt – Unit elastic Demand Elasticity and the Total Expenditures Test
Determinants of Demand Elasticity The answers to three questions help determine a product’s demand elasticity.
Determinants of Demand Elasticity (cont.)• Must answer three questions to determine if a demand for a good is elastic or inelastic. – Can the purchase be delayed? – Are adequate substitutes available? – Does the purchase use a large portion of income? Determinants of Demand Elasticity
Demand and Elasticity Changes in price and totalexpenditures help determine the demand elasticity ofa product.