DEMAND
• Definition: The various quantities of a good or service that
someone is WILLING and ABLE to buy at DIFFERENT PRICES at
a PARTICULAR TIME
• WILLING and ABLE
•Does Mr. Bull have
demand for…?:
YES!
NO!!!
NO!
Individual Demand vs.
Market Demand
• I may not have demand for a porsche, but
others do…
• Market Demand – Sum of all individual’s
demand
Demand Schedule
Grade Upgrade
Certificates
Graphing Demand
Demand Schedule
Demand Curve
Law of Demand
• As Price increases, Quantity
Demanded decreases
• As Price decreases, Quantity
Demanded increases
As P↑, Qd↓
As P↓, Qd↑
Why does the Law of Demand occur?
The law of demand is the result of three
separate behavior patterns that overlap:
1.The Income effect
2.The Substitution effect
3.The Law of Diminishing Marginal
Utility
We will define and explain each…
Copyright
ACDC Leadership 2015
10
Change in Quantity Demanded
• Income Effect
• If price goes down,
purchasing power
goes up and vice
versa
• Substitution Effect
• Pepsi vs. Coke
Nature of Demand Curve
• Diminishing marginal utility
• What would compel you to buy
additional JBCs?
Can you see the Law of Diminishing Marginal
Utility in Disneyland’s pricing strategy?
Copyright
ACDC Leadership 2015
Change in Quantity Demanded
Individual Demand
P
6
P
$5
Qd
10
4
20
3
35
2
55
1
80
Price (per bushel)
5
4
3
2
D2
1
D1
D3
0
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (bushels per week)
3-15
Individual Demand
P
Change in Demand
6
P
$5
Qd
10
4
20
3
35
2
55
1
80
Price (per bushel)
5
Change in Quantity
Demanded
4
3
2
D2
1
D1
D3
0
2
4
6
8
10
12
14
16
18 Q
Quantity Demanded (bushels per week)
3-16
Change in Demand
1. Change in Income
mo’ money = mo’ problems purchases
normal vs. inferior
2. Change in Prices and Availability of Substitutes
ex: Pens and Pencils
3. Change in Prices and Availability of Complements
ex: Paper and Pencils
4. Change in Weather or Seasons
ex: Shorts in winter, Sleds in summer, Gas?
5. Change in Number of Buyers
ex: larger/smaller market, population change, technology
6. Change in Styles, Tastes, Habits, Preferences
fashion, coolness, trends – ex:
7. Change in Expectations
future oriented – ex: harvest, technology
Elasticity
• Measurement of a good’s
responsiveness to a change in price
• The price effect is greater for some
goods than for others
• Examples:
Elasticity
• Large Price Effect → Elastic
Ex:
• Small Price Effect → Inelastic
Ex:
Other
Examples?
Factors Affecting Elasticity
• Wants = more elastic, needs = more inelastic
• Time:
•
•
•
•
Can purchase be delayed?
Time to adjust…
Longer price change persists = more elastic
Immediately after price change = more inelastic
• Availability, Suitability, Price of Substitutes
• More/better/cheaper substitutes = more elastic
• Ex: Ibuprofen vs. Insulin
• Percentage of Budget
• Larger % = more elastic
• Ex: New Car for me vs. LeBron James
Testing for Elasticity of Demand
• Graphical Comparison
Elastic
Inelastic
The flatter the curve, the more Elastic the good.
The steeper the curve, the more Inelastic the good.
***ONLY APPLICABLE WHEN COMPARING 2 CURVES
Testing for Elasticity
• Total Revenue Test --- TR = P x Q
• Example:
• If P and TR move in the same
direction, demand is
inelastic
• If P and TR move in opposite
directions, demand is
elastic
• If TR remains the same when
P changes, demand is
unit elastic
• Grade Upgrade Certificates?
• Gas?
Practice
•Total Revenue Test
Worksheet
Problem 1: Yesterday, the price of envelopes was $3 a
box, and Julie was willing to buy 10 boxes. Today, the
price has gone up to $3.75 a box, and Julie is now willing
to buy 8 boxes. Is Julie's demand for envelopes elastic or
inelastic?
Problem 2: Katherine advertises to sell cookies for $4 a
dozen. She sells 50 dozen, and decides that she can
charge more. She raises the price to $6 a dozen and sells
40 dozen. Is demand for her cookies elastic or inelastic?
Problem 3: Classify demand for each of the following
goods and services as elastic or inelastic:
Eggo waffles
Electricity
House paint
Ground beef
Kidney transplants
College textbooks
Extreme Cases
• Perfectly Inelastic Demand
• Consumers will purchase the same quantity of a good
or service regardless of the price
• Examples?
• Insulin, Antivenin
• Perfectly Elastic Demand
• Consumers will purchase infinitely more or less of a
good or service with any price change
• Examples?
• No true examples…
• Partial Examples:
• Luxury Goods, Black Friday
Extending Elasticity
• How does elasticity of demand affect us?
• What do these have in common?
• Government taxes inelastic goods… Why?
• Why doesn’t govt. tend to tax elastic goods?
“Government's view of the economy could be summed up
in a few short phrases: If it moves, tax it. If it keeps moving,
regulate it. And if it stops moving, subsidize it.”
-Ronald Reagan