THE ECONOMIC WAY OF THINKING

W HAT I S D EMAND ? The word “DEMAND” can mean a lot of things. It can be used as a verb – “I demand to see you” or in ECONOMICS it would mean something along the lines of “I want”. Demand is the amount of goods that consumers desire and can afford to buy over a range of prices Consumers normally want more goods at a lower price, and less goods at a higher price For example, the quantity demanded of a soda might be 300 bottles when it costs $2 and 250 bottles when it costs $3

W HAT I S D EMAND ? (C ON ’ T ) A good way to think of demand is as a table, with the left column being the price & the right column being the units demanded Demand graph for a product Prices are always graphed on the Y-AXIS Units demanded (quantity) are always graphed on the X-AXIS

W HAT D ETERMINES P RICE ? If demand INCREASES, prices RISE! Prices are never steady regardless if they are agricultural or non-agricultural products. Higher prices : demand Lower prices: demand Greater quantities sell at lower prices Higher prices come from selling smaller quantities At lower prices new buyers come into the market & those already buying, buy more Example: Compare rib eye steaks at $6.25/lb with rib eye steaks at $2.25/lb. At the lower price people that had not been eating rib eyes would enter the market & more steaks would be sold.

W HY D OES D EMAND S LOPE D OWNWARD ? The more a product costs, the less of it a person can afford to buy with the same income Example: Coke and Pepsi Let’s say the average person spends $3 each day on soda, and Coke and Pepsi each cost $1.50. One would assume that someone with $3 would buy 1 Pepsi and 1 Coke. Now let’s assume Pepsi drops its price to $1 per soda Result: Someone with $3 would buy 3 Pepsis because there is more value for money here The quantity demanded for Pepsi will increase as the price falls, because Pepsi will attract consumers away from competing products

W HEN D OES D EMAND S LOPE U PWARDS ? Some products have demand graphs that result in a higher demand for a higher price Example: Rolex watches Many people buy Rolex watches simply because they are EXPENSIVE! This is also the same for designer clothes, expensive cars (Escalade, Range Rover, etc.), and other goods.

W HAT W OULD C HANGE T HE D EMAND OF A G OOD ? CHANGE IN THE NUMBER OF CONSUMERS IN THE MARKET FOR A PRODUCT If the number of consumers in the market for a product increases, the demand for the product will increase. If a new high school is built in the same block as a fast food restaurant, the demand for the fast-food restaurant's products will increase. When the school closes for summer vacation, the demand for the fast-food restaurant's products will decrease

W HAT W OULD C HANGE T HE D EMAND OF A G OOD ? CHANGE IN CONSUMER TASTES AND PREFERENCES FOR A PRODUCT If consumer tastes and preferences for a product change, the demand for the product will change. If fashion magazines are showing short skirts, the demand for short skirts will increase. If fashion magazines show few pictures of short skirts, the demand for these skirts will decrease.

W HAT W OULD C HANGE T HE D EMAND OF A G OOD ? CHANGE IN CONSUMER INCOME If consumer income increases, demand for most goods and services will increase. The reverse is also true. If consumer income decreases, demand for most goods and services will decrease. For example, if workers at a manufacturing facility sign a new contract that provides a 5% raise, these workers will have more income and their demand for goods and services will increase. If Social Security taxes increase for employees, consumers will have less take-home pay, and as a result, their demand for goods and services will decrease.

W HAT W OULD C HANGE T HE D EMAND OF A G OOD ? CHANGE IN THE PRICE OF RELATED GOODS (COMPLEMENTS) A change in the price of one good can change the demand for another good. One type of related goods is complements-goods that are purchased together. A decrease in the price of strawberries will cause an increase in the demand for whipped cream. An increase in the price of hamburger will cause a decrease in the demand for hamburger buns.

W HAT W OULD C HANGE T HE D EMAND OF A G OOD ? CHANGE IN THE PRICE OF RELATED GOODS – SUBSTITUTES A change in the price of one good can change the demand for another good. One type of related goods is substitutes-goods that are bought in place of other goods. If the price of movie tickets increases, the demand for video rentals may increase. If the price of Hamburger Heaven's hamburgers decreases, the demand for Big Burger's hamburgers may decrease. All of these factors are called SHIFTERS, because they tend to change or shift the relationship between the price and the quantity demanded.