Demand
 Chapter
4:
Demand
Demand


Demand means the willingness and capacity to
pay.
Prices are the tools by which the market
coordinates individual desires.
The Law of Demand

Law of demand – there is an inverse relationship
between price and quantity demanded.


Quantity demanded rises as price falls, other things
constant.
Quantity demanded falls as prices rise, other things
constant.
Demand in Output Markets
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
PRICE
(PER
CALL)
$
0
0.50
3.50
7.00
10.00
15.00
QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0


A demand schedule
is a table showing
how much of a given
product a household
would be willing to
buy at different prices.
Demand curves are
usually derived from
demand schedules.
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
PRICE
(PER
CALL)
$
0
0.50
3.50
7.00
10.00
15.00
QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0

The demand curve is
a graph illustrating
how much of a given
product a household
would be willing to
buy at different prices.
SUMMARY
The Law of Demand
• The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity
of a good demanded
and its price.
• This means that
demand curves slope
downward.
Demand vs. Quantity
Demanded

Demand is the amount of a product that
people are willing and able to purchase at
each possible price during a given period
of time.

The quantity demand is the amount of a
product that people are willing and able to
purchase at one, specific price.
Price (per unit)
Change in Quantity Demanded
$2
B
Change in quantity demanded
(a movement along the curve)
$1
A
D1
0
100
200
Quantity demanded (per unit of time)
Shifts in Demand Versus
Movements Along a
Demand Curve

A shift in demand is the graphical
representation of the effect of anything other
than price on demand.
SUMMARY
A Change in Demand Versus a Change in
Quantity Demanded
•
When demand shifts to
the right, demand
increases. This causes
quantity demanded to be
greater than it was prior to
the shift, for each and
every price level.
Shifts of the Demand Curve
Price
Increase in
demand
An“decrease
A
“increasein
indemand”,
demand”
means a rightward
leftward shift
shiftofof
the demand curve: at any
given price, consumers
demand a larger
smallerquantity
quantity
than before. (D1D2)
(D1D3)
Decrease in
demand
D
3
D
1
D
2
Quantity
An Increase in Demand
Price of
coffee beans
(per gallon)
$2.00
Increase in
population 
more coffee
drinkers
1.75
Demand curve
in 2006
1.50
1.25
1.00
0.75
0.50
0
Demand curve
in 2002
7
9
D
11
13
1
15
D
2
17
Quantity of coffee beans
(billions of pounds)
A shift of the demand curve is a change in the quantity demanded at any
given price, represented by the change of the original demand curve to a new
position, denoted by a new demand curve.
SUMMARY
The Impact of a Change in Income
•
Higher income decreases the
demand for an inferior good
•
Higher income increases
the demand for a normal
good
What Causes a Demand Curve to Shift?

Changes in Income


Normal Goods: When a rise in income increases the
demand for a good - the normal case - we say that the
good is a normal good.
Inferior Goods: When a rise in income decreases the
demand for a good, it is an inferior good.
Changes in Demand
SUMMARY
The Impact of a Change in the
Price of Related Goods
•
•
•
Demand for complement good
(ketchup) shifts left
•
Demand for substitute good (chicken)
shifts right
Price of hamburger rises
Quantity of hamburger
demanded falls
Changes in Demand
Changes in Demand
Changes in Demand
An Increase in Demand


An increase in the
population and other
factors generate an
increase in demand –
a rise in the quantity
demanded at any given
price.
This is represented by
the two demand
schedules - one
showing demand in
2002, before the rise in
population, the other
showing demand in
2006, after the rise in
population.
Demand Schedules for Coffee Beans
Quantity of coffee
beans demanded
(billions of pounds)
Price of coffee
beans (per
pound)
in 2002
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
7.1
7.5
8.1
8.9
10.0
11.5
14.2
in 2006
8.5
9.0
9.7
10.7
12.0
13.8
17.0
SUMMARY
A Change in Demand Versus a Change in
Quantity Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded
(Movement along the curve).
Change in income, preferences, or
prices of other goods or services
leads to
Change in demand
(Shift of curve).
SUMMARY
From Household to Market Demand
• Demand for a good or service can be
defined for an individual household, or
for a group of households that make up a
market.
• Market demand is the sum of all the
quantities of a good or service demanded
per period by all the households buying in
the market for that good or service.
Individual Demand Curve and the Market Demand
Curve
The market demand curve is the horizontal sum of the
individual demand curves of all consumers in that market.
(a)
(b)
(c)
Darla’s Individual
Demand Curve
Dino’s Individual
Demand Curve
Market Demand Curve
Price of
coffee
beans (per
pound)
Price of
coffee
beans (per
pound)
$2
Price of
coffee
beans (per
pound)
$2
$2
DMarket
1
1
1
DDarla
0
20
30
Quantity of coffee
beans (pounds)
DDino
0
10
20
Quantity of coffee
beans (pounds)
0
30
40
50
Quantity of coffee
beans (pounds)
SUMMARY
Elasticity . . .
• … allows us to analyze supply and demand with
greater precision.
• … is a measure of how much buyers and sellers
respond to changes in market conditions
SUMMARY
THE ELASTICITY OF DEMAND
• Price elasticity of demand is a measure of how
much the quantity demanded of a good responds to
a change in the price of that good.
• Price elasticity of demand is the percentage change
in quantity demanded given a percent change in
the price.
SUMMARY
Determinates of Demand Elasticity
• Can the purchase be delayed?
• Are Adequate Substitutes Available?
• Does the Purchase Use a Large % of Income?
SUMMARY
The Price Elasticity of Demand and Its
Determinants
• Demand tends to be more elastic :
– the larger the number of close substitutes.
– if the good is a luxury.
– if the purchases represents a large portion of income.
SUMMARY
Computing the Price Elasticity of
Demand
• The price elasticity of demand is computed as the
percentage change in the quantity demanded
divided by the percentage change in price.
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
SUMMARY
Computing the Price Elasticity of
Demand
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
• Example: If the price of an ice cream cone
increases from $2.00 to $2.20 and the amount you
buy falls from 10 to 8 cones, then your elasticity of
demand would be calculated as:
(10  8)
 100
20%
10

2
(2.20  2.00)
 100 10%
2.00
SUMMARY
The Midpoint Method: A Better Way to
Calculate Percentage Changes and
Elasticity
*The midpoint formula is preferable when calculating
the price elasticity of demand because it gives the
same answer regardless of the direction of the
change.
(Q 2  Q1 ) / [(Q 2  Q1 ) / 2]
Price elasticity of demand =
(P2  P1 ) / [(P2  P1 ) / 2]
SUMMARY
The Midpoint Method: A Better Way to
Calculate Percentage Changes and
Elasticity
• Example: If the price of an ice cream cone
increases from $2.00 to $2.20 and the amount you
buy falls from 10 to 8 cones, then your elasticity of
demand, using the midpoint formula, would be
calculated as:
(10  8)
22%
(10  8) / 2

 2.32
(2.20  2.00)
9.5%
(2.00  2.20) / 2
SUMMARY
The Variety of Demand Curves
• Inelastic Demand
– Quantity demanded does not respond strongly to price
changes.
– Price elasticity of demand is less than one.
• Elastic Demand
– Quantity demanded responds strongly to changes in
price.
– Price elasticity of demand is greater than one.
SUMMARY
The Variety of Demand Curves
• Perfectly Inelastic
– Quantity demanded does not respond to price changes.
• Perfectly Elastic
– Quantity demanded changes infinitely with any change in
price.
• Unit Elastic
– Quantity demanded changes by the same percentage as
the price.
SUMMARY
Income Elasticity of Demand
• Income elasticity of demand measures how much
the quantity demanded of a good responds to a
change in consumers’ income.
• It is computed as the percentage change in the
quantity demanded divided by the percentage
change in income.
SUMMARY
Income Elasticity
• Goods consumers regard as necessities tend to be
income inelastic
– Examples include food, fuel, clothing, utilities, and
medical services.
• Goods consumers regard as luxuries tend to be
income elastic.
– Examples include sports cars, furs, and expensive foods.