DEMAND
Whatcha Whatch Whatcha Whatcha Want! (and are
able to buy)
Demand
• The DESIRE, ABILITY, and Willingness of a
consumer to buy a product.
• Ex: just wanting a product does not mean you have
demand for it. I may want a Rolls Royce Car, but I do
NOT have the ability to pay for it, so I do not have
demand for it.
How is demand for a product
measured?
• Demand is the amount of a good or service that
consumers are willing and able to buy at a given price
• Example: at $4 each, I may buy 5 books, but at $10 each I
may only buy 2. The quantity I demand shifts based on the
given price.
Conditions of Demand
• 1. Consumers must be willing and able to buy the
product.
• Demand for a House? Candy Bar? Lexus?
• 2. Demand can only be measured for a specific
period of time because it changes.
• What if I won the lottery tomorrow? Would my demand
for a House or a Lexus change?
The Law of Demand
• There is an inverse relationship between the price of a
product and the quantity demanded by consumers.
• As the price of the product increases the quantity
demanded decreases.
• As the price of the product decreases the quantity
demanded increases.
• CD Example?
Income Effect
• A person’s ability to buy a product is determined by
the size of his/her income relative to the price of the
product.
• Things seem expensive or cheap to you depending on
your income.
• Example: If I make $50,000 a year, I have a strong
ability to buy a candy bar. However I do not have a
strong ability to buy a $1 million house.
Income Effect, cont’d.
• If the price of a product goes down, the consumer’s
income has a greater ability to buy the product. This
is an increase in the quantity demanded. Therefore
the consumer is likely to buy a greater quantity of the
product.
• A lower price increases the purchasing power of your
income
• Example?
Income Effect, cont’d.
• If the price of the product goes up, the consumer’s
income has a weaker ability to buy the product. (a
lower quantity demanded). Therefore, the consumer
is likely to buy a smaller quantity of the product.
• A higher price decreases the purchasing power of your
income.
• Example?
Substitution Effect
• A change in the quantity (amount) that a consumer
will buy because they are buying substitute goods
instead.
• Example: If coffee gets too expensive, I will switch
to tea.
Diminishing Marginal Utility
• Can you remember, what is Utility??
• Marginal Utility: The happiness or satisfaction we
receive from one additional unit.
• CANDY BAR EXAMPLE
• Diminishing Marginal Utility: The more we use or
consume a product, the less use or
satisfaction we receive from it.
• Example: Buffet Restaurant
Law of Diminishing Marginal Utility
• As the price of a product decreases, the
quantity demanded increases (that’s the law
of demand) UNLESS or UNTIL, the
consumer begins to experience diminished
marginal utility.
• Basically: if you think something is cheap,
you will keep buying a high quantity of it,
until you do not feel any satisfaction from
getting just one more.
Write your script
• Write out a brief script of a conversation between a
buyer and a seller where as the price of a product
decreases, the quantity demanded increases unless or
until the consumer begins to experience diminished
marginal utility.
Demand Schedules and Curves
• A demand schedule is a list of possible prices of a
product and the corresponding quantity demanded.
• Basically how much you would want of something at a
given price.
• A demand curve is a graph that illustrates the inverse
relationship between price and quantity demanded.
• All demand curves slope downward from left to
right showing that as priced decreases quantity
demanded increases
A Demand Schedule
• Price x Quantity = total revenue
• As price rises the quantity demanded falls
Demand Schedule
Price Per
DVD
Quantity
Demanded
30
50
25
75
20
100
20
15
125
15
10
175
10
5
300
5
35
30
25
Demand
Schedule
0
50
75
100 125 175 300
Chart your own!
Price per shirt
12
10
8
6
4
2
Quantity
demanded
10
20
30
40
50
60
Changes in Quantity Demanded
• Changes in the quantity demanded can ONLY be
causes by changes in price
• Changes in the quantity demanded result in
movement along the demand curve.
• Changes in the quantity demanded are explained by
the law of demand which states that as price
decreases, the quantity demanded increases.
• A change in price will result in
movement along the curve
(sliding up or down on the
curve)
Changes in Demand
• Sometimes consumers will demand more or less of
the product even though the prices HAS NOT
CHANGED.
• A change in demand occurs whenever more or
less of the product is demanded at every price.
• * A change in demand causes a SHIFT in the curve.
• Notice how the entire curve
shifts out! D1D2
D1
D2
Non-Price Factors (Determinants) of Demand
• A change in demand can ONLY occur when there is
a change in something other than price!
• An increase in demand causes
P
the curve to shift to the RIGHT
Q
• A decrease in demand causes the
P
D2
D1
curve to shift to the LEFT
Q
Non-Price Determinants of
Demand
• These are the ONLY things that can change
demand!! A change in the price will only change the
quantity (amount) you demand. These things change
your willingness or ability to buy the product!
Consumer Tastes and Preferences
• When a good or service enjoys high popularity
consumers demand more of it.
• Advertising: the strongest influence on consumer
tastes
• Examples?
Consumer Income
• As a consumer’s income changes, so does their ability
to buy products. (getting raises or getting your hours
cut)
• Normal Goods: goods that consumers demand
more of when their income rises (expensive clothing)
• Inferior Goods: goods that consumers demand less
of when their income rises (used books, generic
brand food)
Market Size (# of consumers)
• If the number of consumers increases or decreases
the market size changes and affects demand.
• Example: The Jersey Shore: demand for pizza on the
Jersey shore is very high from June-August, but drops A
LOT the rest of the year.
Consumer Expectations
• What you expect about the future can affect your
buying habits today.
• Example: Wall Street employees get bonuses at the end of
the year so they wait until January to make major purchases
• Other Examples?
Price of Related Goods
• Substitutes: goods and services that can be used in
place of each other. If the price of a substitute good
drops, demand for the substitute will increase and
demand for the original good will decrease. Ex.
Coffee/tea
Prices of Related Goods
• Complements: goods that are used together so that a
rise in demand for one, increases the demand for the
other. Also if the price for one product rises,
demand for both will fall.
• Example: Peanut butter and Jelly, Ipods and MP3s
Elasticity of Demand
• Elasticity of Demand: The extent to which changes
in price cause changes in the quantity demanded.
• Basically, how much the quantity you demand can
Elastic Demand
• A change in the price causes a relatively large change
in the quantity demanded
• If beef gets too expensive, customers will switch to
chicken and the quantity demanded for beef will decrease.
• Demand is elastic if the calculation is greater than 1.
Inelastic Demand
• A change in price causes a relatively small change in
the quantity demanded.
• Example: if the price of insulin goes up everywhere,
people will diabetes will still buy the same amounts because
they need it to survive.
• Demand is inelastic if the calculation is less than 1.
Unit Elastic
• A change in prices causes a proportional change in
quantity demanded.
• Example: If the price of an item goes up 10%, the
quantity demand goes down 10%
• Demand is unit elastic if the calculation is exactly 1.
What determines Elasticity?
Are adequate substitutes available?
• If adequate substitutes are available then demand tends to be
elastic.
• Example: If the price of beef goes up, people can substitute chicken,
pork, fish, tofu. (causing a relatively large change in the quantity of
beef demanded)
• If adequate substitutes are not available then demand tends to
be inelastic
• Example: If the price of insulin goes up, diabetics will still buy the
same amount of it (causing a relatively small change in the quantity
demanded)
What proportion of your income do
you spend on the good?
• If I spend a high proportion of my income then demand
is elastic
• Example: I spend 15% of my income on an expensive hobby.
If the price of the goods associated with that hobby goes up, I
can just cut back on how much I do that hobby
• If I spend a low proportion of my income then my
demand is inelastic
• Example: if the price of pencils goes up it will not affect my
quantity demanded because I spend so little on these items
anyways.
Can the Purchase be Delayed?
(necessity or luxury)
• If the purchase can be delayed demand is elastic
• Example buying plane tickets to go on a vacation
• If the purchase cannot be delayed, demand is
inelastic
• Example: buying plane tickets to attend a family member’s
funeral.
Calculating Elasticity of Demand
• Why do we need to calculate elasticity of demand?
• Businesses use it to determine the need for price cuts
• If demand is elastic (greater than 1) then price cuts
might help the business earn more.
• Beef
• If demand is inelastic (less than 1) price cuts will not
help the business earn more
• Insulin
How to Calculate Demand Elasticity
• You will need to know 4 pieces of information
•
1.
Original quantity
2.
New quantity
3.
Original price
4.
New price
You will also most likely need a calculator to
complete these problems
The Steps
Step 1:
Original quantity — New quantity X 100 = percentage change in
Original quantity
quantity demanded
Step 2:
Original price — New Price
X 100 = Percentage change in
Original Price
price
Step 3:
Percentage change in quantity demanded
=
ELASTICITY
Percentage change in price
IF the ELASTICITY number is greater than 1, demand is elastic.
IF the ELASTICITY number is less than 1, demand is inelastic.
Total Revenue Test
• Total Revenue is price times quantity demanded.
• The Total Revenue Test: One way to determine price
elasticity of demand is to examine what happens to
total revenue when the price for a product changes.
Price
IF….
Total
Revenue
UP
Down
Elasticity of
Demand
Elastic
Down
Up
Elastic
Up
Up
Inelastic
Down
Down
Inelastic
Up or Down
Equal
Unit Elastic
Let’s try some Examples! 
Price rises from $5 to $6. Quantity demanded decreases from 15 to 10.
• Old price x old quantity demanded = old total revenue
________x __________ = ___________
• New price x new quantity demanded =new total revenue
________x __________ = ___________
Price goes _______and total revenue goes _____ so demand is
__________
Example #2
Price falls from $10 to $8. Quantity demanded increases from 12 to
16.
• Old price x old quantity demanded = old total revenue
________x __________ = ___________
• New price x new quantity demanded =new total revenue
________x __________ = ___________
Price goes _______and total revenue goes _____ so demand is
__________
FINALLY WE ARE DONE WITH DEMAND!