demand

1. DEMAND

2. LAW OF DEMAND:
As the price of a product
increases, quantity demanded
falls; likewise, as the price of a
product decreases, quantity
demanded increases.
P= QD P= QD

3. REASONS THAT EXPLAIN
THE LAW OF DEMAND:
1. Diminishing Marginal Utility
2. Income Effect
3. Substitution Effect

4. Reasons that explain the law of Demand:
DIMINISHING MARGINAL UTILITY
Utility is how
much pleasure a
consumer gets
from a good.
! It is measured
in utils.

5. Reasons that explain the law of Demand:
Each time you
benefit from
consuming a
good, economists
say you are
experiencing
marginal utility.
DIMINISHING MARGINAL UTILITY
Mmm! SO hungry!

6. Reasons that explain the law of Demand:
LAW OF
DIMINISHING MARGINAL UTILITY:
As a person increases consumption
of a product, there is a decline in the
marginal utility that person derives
from consuming each additional unit
of that product.

7. LAW OF
DIMINISHING MARGINAL UTILITY:
Burger 1 Burger 2 Burger 3
You are hungry! Eating
the burger gives lots of
instant satisfaction!
You are still sort of
hungry. Eating another
burger gives some
satisfaction.
You are full! Eating the
burger gives very little
satisfaction.
Utility Utility Utility

8. LAW OF
DIMINISHING MARGINAL UTILITY:

9. LAW OF
DIMINISHING MARGINAL UTILITY:
“If one mint makes your breath smell
fresh, why not eat fifty of them? Answer:
diminishing marginal utility. If exercising for
one hour is good for your health, why not
exercise for 24 hours straight?
Diminishing marginal utility. If a drop of
perfume makes you smell nice, why not
wear the whole bottle? You guessed it -
diminishing marginal utility!”

10. Reasons that explain the law of Demand:
DIMINISHING MARGINAL UTILITY
As you consume more and more of a good,
its marginal utility decreases. You will stop
your consumption of the good in the short
run because it no longer satisfies you.
Thus, the only way you will demand more of
the good is if the price decreases.
P= QD P= QD

11. Reasons that explain the law of Demand:
THE INCOME EFFECT
The relationship between income and the
quantity demanded is a positive one, as
income increases, so does the quantity of
goods and services demanded.

12. Reasons that explain the law of Demand:
THE INCOME EFFECT
When income affects the buying patterns of
individuals, the change is attributed to the
“income effect”

13. Reasons that explain the law of Demand:
THE SUBSTITUTION EFFECT
The idea that as prices rise, consumers will
replace more expensive items with less
costly alternatives.

14. Reasons that explain the law of Demand:
THE SUBSTITUTION EFFECT
When related products affect the buying
patterns of individuals, the change is
attributed to the “substitution effect”

15. LAW OF DEMAND:
P= QD P= QD

16. DEMAND CURVE:
A model that shows
the relationship
between the quantity
of goods and services
that people are
willing to buy, and the
ideal price of those
goods and services at
any given quantity.

17. DEMAND CURVE:
A demand curve can
represent the preferences
of an entire group of
people, or the preferences
of an individual.
of burgers
of burgers
This is how
much I am
willing to pay
for burgers!

18. DEMAND CURVE:
When the price is 1$, how
many burgers is Max going
to buy?
! What about when the
price is 2$? or 3$?
of burgers
of burgers
This is how
much I am
willing to pay
for burgers!

19. The demand
curve slants
downward.
!
Remember
“D”
for “down”!
P= QD P= QD

20. CHANGES IN PRICE:
Changes in price result in movement along
the demand curve.
5
!4
!3
!2
!1
2 4 6 8 10
P (of gum)
QD (of gum)
I heard the
price of a
pack of gum
is rising!

21. CHANGES IN PRICE:
Changes in price result in movement along
the demand curve.
5
!4
!3
!2
!1
2 4 6 8 10
P (of gum)
QD (of gum)
5
!4
!3
!2
!1
P1
P2
2 4 6 8 10
P (of gum)
QD (of gum)

22. CHANGES IN PRICE:
We are only able to predict consumer
preferences with the ceteris paribus
assumption in effect.
5
!4
!3
!2
!1
2 4 6 8 10
P (of gum)
QD (of gum)
Remember, under
ceteris paribus, “all
else is constant.”
This means that
nothing else besides
the price is changing.
P1
P2

23. SHIFTS IN DEMAND:
ONLY changes in price result in movement
along the demand curve. Changes in other
factors can actually SHIFT the demand curve.
• Change in income
!
• Change in preferences
!
• Change in future expectations
!
• Change in the price of a substitute or
compliment good

24. SHIFTS IN DEMAND:
Change in price = change in quantity demanded
Change in other factors = change in demand
P (of gum) QD (of gum)
P (of gum)
QD (of gum)
Change in Price Change in other factors

25. SHIFTS IN DEMAND:
Change in
Income:
If Max gets a raise
at work, he will
buy more of what
he likes. This
appears as a shift
in the demand
curve to the right.
5
!4
!3
!2
!1
D1
D2
2 4 6 8 10
P (of gum)
QD (of gum)
What happens to the curve when Max gets a pay cut at work?

26. SHIFTS IN DEMAND:
Change in
Preferences:
If Max decides he
does not like gum
any more, he will
buy less overall.
This causes the
curve to shift left.
5
!4
!3
!2
!1
D1
D2
2 4 6 8 10
P (of gum)
QD (of gum)
What happens to the curve when Max decides that gum is his favorite thing ever?

27. SHIFTS IN DEMAND:
Change in
Future
Expectations:
If Max hears that
the price of gum is
going to go up, he
is willing to buy
more gum today.
D1
D2
What happens to the curve when Max hears that the price of gum is going to
decrease?
5
!4
!3
!2
!1
2 4 6 8 10
P (of gum)
QD (of gum)

28. SHIFTS IN DEMAND:
Change in the
price of a
substitute:
When the price of
a substitute good
goes up, people will
buy more of the
cheaper good, and
demand goes up
(shifts right)
Substitute Goods:
Goods that can be
used for the same
purpose.
What happens to the curve if the price of a substitute does down?

29. SHIFTS IN DEMAND:
Change in the price
of a substitute:
“Super Chew” gum
became more
expensive this week.
As a result, the QD
of “Flavor Burst” gum
increased.
5
!4
!3
!2
!1
D1
D2
2 4 6 8 10
P (of FB gum)
QD (of FB gum)
Because one item is more expensive, people will seek similar items and buy
them instead.

30. SHIFTS IN DEMAND:
5
!4
!3
!2
!1
D1
D2
2 4 6 8 10
P (of FB gum)
QD (of FB gum)
Ask yourself:
If the price of “Super
Chew” increased,
will people buy
more or less Super
Chew? Are Super
Chew and “Flavor
Burst” substitutes? If
people buy less SC,
will they buy more
or less FB?

31. SHIFTS IN DEMAND:
Change in the
price of a
compliment:
When the price of a
good goes up,
people will buy
Complimentary Goods:
Goods that are often
used together (and
therefore purchased
together)
less of its
complimentary
goods as well.
What happens to the curve the price of a compliment does down?

32. SHIFTS IN DEMAND:
Change in the
price of a
compliment:
The price of iPhones
decreased. The
quantity demanded
of iPhone cases
increases.
5
!4
!3
!2
!1
D1
D2
2 4 6 8 10
P (of cases)
QD (of cases)
What happens to the Qd of iPhone cases when the price of iPhones goes up?

33. SHIFTS IN DEMAND:
Ask yourself:
If the price of
iPhones decreased,
will people buy
more or less
iPhones? Are iPhone
cases a compliment
to iPhones? If people
buy more iPhones,
will they buy more
or less iPhone cases?
5
!4
!3
!2
!1
D1
D2
2 4 6 8 10
P (of cases)
QD (of cases)

34. PRACTICE PROBLEM #1:
How much candy is
Maxine willing to
purchase at the price
of 4$?
At the price of 1$
5
P (of candy) QD (of candy)
!4
!3
!2
!1 4 8 12 16 20

35. PRACTICE PROBLEM #2:
Max is at the store shopping for
shirts. He is about to buy one shirt
at the regular price, then he notices
it is on sale. He decides to buy two
additional shirts.
!
Represent this situation with a
demand graph.

36. PRACTICE PROBLEM #3:
Maxine’s parents
decide to increase
her allowance. How
will this influence
maxine’s demand
curve for candy?
Draw Maxine’s new
D2 curve.
5
D1
P (of candy) QD (of candy)
!4
!3
!2
!1 4 8 12 16 20

37. PRACTICE PROBLEM #4:
Maxine hears that
the weather will
start to get cold
tomorrow. How
does this affect her
demand curve for ice
cream today?
P (of ice cream) QD (of ice cream)
5
!4
!3
!2
D1
!1 2 4 6 8 10

38. PRACTICE PROBLEM #5:
Max read a study
that said that the
eating of ice cream
can weaken your
immune system.
How might this
influence Max’s
demand curve for ice
cream?
5
!4
!3
!2
!1
D1
2 4 6 8 10
P (of ice cream)
QD (of ice cream)

39. PRACTICE PROBLEM #6:
The price of ice
cream at the grocery
store just decreased.
How will this affect
the demand curve
for chocolate syrup?
5
!4
!3
!2
!1
P (of syrup)
D1
2 4 6 8 10
QD (of syrup)

40. PRACTICE PROBLEM #7:
The price of frozen
yogurt at the
grocery store just
decreased. How will
this affect the
demand curve for
ice cream?
5
!4
!3
!2
!1
D1
2 4 6 8 10
P (of ice cream)
QD (of ice cream)

41. PRACTICE PROBLEM #8:
Label the following pairs as either
substitutes or compliments:
1. Nail polish and nail polish remover
2. Cars and tires
3. Chicken and turkey
4. Sheets and pillowcases
5. Sweaters and sweatshirts