DEMAND
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Different people place different valuation on
the same good. Meaning they will pay
different prices for the same good (Love, Like,
Hate relationship)
In general, people want to buy more of any
good at lower prices. And they will buy less at
higher prices, this is called the LAW OF
DEMAND. But it does not tell us how much
more or less.
SUPPLY
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Producers are driven by the profit motive.
Therefore they will supply more of a good at
higher prices, and less of the good at lower
prices. This is called the LAW OF SUPPLY.
These laws apply to normal goods, but not
inferior goods.
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Normal goods = income rises, we want more
Inferior goods = income rises, we want less
Determinants of Demand
1.
2.
3.
4.
5.
Tastes and Preferences
Income
Population
Substitutes (PowerAde over Gatorade)
Complements (Tires and cars)
Determinants of Supply
1.
2.
3.
Size of Industry
Technology
Cost of Inputs (steel prices for cars, rubber for tires
or weather)
Price of Related Outputs (price of tablets goes
up
**As more firms enter the industry, the market
supply curve will shift out, driving down prices.
4.
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Changes in determinants will cause a shift in
that line, which is a whole new line.
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The price change is always caused by a shift.
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Shift in Demand = Change in demand
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This a whole new line
Movement Along Demand = Change in
Quantity Demanded
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This is the same line
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Definitions
Utility
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Marginal Utility
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Largest amount of money consumer will give up for one
more unit of that good.
Total Utility
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Amount of satisfaction consumer gets from buying a product.
Largest sum of money a consumer is willing to spend for a
bundle of goods.
Diminishing Marginal Utility
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Utility, or satisfaction, decreases with each marginal
use. Opposite can be true too. Examples?
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For a given change in price, there is a small
change in quantity.
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The product is unresponsive to the price change.
QD changes by a smaller percentage than price
changes.
P up 10%, QD down 5%.
Examples
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Necessities - Insulin
No close substitutes - beanie babies, cabbage patch
dolls
Small fraction of income - shoelaces, salt
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For a given change in price, there is a large
change in quantity.
The product is very responsive to price change.
QD changes by a larger percentage than price
changes.
 P up 10%, QD down 15%
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Examples
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Luxury Goods
Large percent of income
Many close substitutes - Beef/Chicken, Ford/Chevy,
Soup brands
Inelastic / Elastic usually depends on number
of substitutes.
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1948 – McDonald’s Hamburgers
1968 – Big Mac
1973 – Quarter Pounder
1981 – McRib
1985 – Mc BLT
1991 – McLean Deluxe
1993 – Arch Deluxe
2001 – Big N’ Tasty
2007 – Angus Third Pound
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1993 – $23.5 Billion
1995 – $19.9 Billion
Market Share Loss of 12%
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1% = 800 Million in an 80 Billion Dollar Industry
That’s a $9.6 Billion Dollar Loss in Profits
1999 – $33.6 Billion
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Gasoline prices
Jimmy Johns Subs
Titliest Golf Clubs
Home prices
Lawn mowers
Bears season tickets
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Are these elastic or inelastic, explain why?
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