Warm-up A student opens a school lunch account with an opening balance of $50. Lunch costs $2 per day, and the student charges lunch to his account each day. Write an equation representing the balance of the account in terms of the number of lunches charged.

1.What is demand? 2.What is the law of demand? 3.What is the difference between demand and quantity demanded? 4.What is the difference between individual and market demand? 5.What is a demand curve? How is it made?

What is demand? Demand is the behavior of buyers (consumers) –Consumers, households in a product market Demand is the various quantities of a good (or service) the consumer is willing and able to buy at all prices during a time period, ceteris paribus –Willing: wants to buy a good –Able: can afford the good –CP: all things other than price (as an affect) are constant/unchanging

Quantity demanded (Q) Quantity demanded is the amount of g/s consumers are willing & able to buy at a specific price. What is the relationship between quantity demanded and price in a market? –As price increases, quantity demanded decreases We show this relationship between Q and P using a demand curve.

Representing quantities demanded A demand schedule, or table listing quantities demanded at different prices Information in the schedule can be plotted as a graph, called a demand curve. –Quantity (Q) on x-axis –Price (P) on y-axis Schedule and curve only tells us the Q prepared to buy at a certain P

SCHEDULE CURVE

The law of demand Law of demand: there is a negative causal relationship between quantity demanded and price of a good over time, ceteris paribus In other words, P and Q change in opposite directions –As one falls, the other increases (negative or indirect relationship)

So what’s up with the curve? It’s not really “curvy” in most graphs you’ll see. This is because it does not account for elasticity (we’ll talk more about this) The downward sloping demand curve is set in the principle of decreasing marginal benefit (utility): since marginal benefit falls as quantity consumed increases, the consumer will be induced to buy each extra unit as price falls –This makes sense to us: When a g/s goes on sale, consumers buy (demand) more because the price is reduced.

Why do P and Q move in opposite directions? The law of diminishing utility “thinking at the margin” principle tells us consumers choose not whether to buy, but how much to buy. This raises the question of utility: satisfaction in consuming one more item The income effect Scarcity of income means that if the price of a g/s increases, people won’t be able to buy the same quantity as they original price The substitution effect substitute goods are a type of good that can satisfy the same want as an “original” good, but often at a lower cost (competition) –At some point, people will substitute the cheaper good due to price –Ex: “Dr. Thunder” rather than Dr. Pepper

Individual Demand vs. Market Demand Market demand shows the total quantities in the market for the good consumers are willing and able to buy at all prices –during a particular period of time, ceteris paribus Market demand: the sum of all individual demands for a good –also the sum of consumers’ marginal benefits