Chapter 4: Section 1 Understanding Demand What Is Demand? Demand is the willingness and ability of buyers to purchase different quantities of a good, at different prices, during a specific time period. Both willingness and ability must be present; if either is missing, there is no demand. Quantity demanded is different from demand. Quantity demanded is the number of units of a good purchased at a specific price. Quantity demanded is always a number.

The Law of Demand The law of demand tells us what happens to the quantity demanded when the price changes. (See Transparency 4-1.) Basically, it says that when the price goes up, the quantity demanded goes down—and when the price goes down, the quantity demanded goes up.Transparency 4-1 Do you notice anything about the relationship between price and quantity demanded? They move in opposite directions.

TRANSPARENCY 4-1: The Law of Demand

Why is the law of demand important, and what does it mean to you? It shows that you, and other consumers, are willing to purchase fewer goods as the price goes up. And it shows that you are willing to purchase more goods as the price goes down.

The Law of Diminishing Marginal Utility Why does the law of demand work the way it does? Economists say it is because of the law of diminishing marginal utility. This is an interesting idea that sounds more difficult to understand than it is. Let’s break the term down. (See Transparency 4-2.)Transparency 4-2 Diminishing simply means declining or decreasing. Whatever we are talking about, if it is diminishing, it’s going down.

TRANSPARENCY 4-2: Diminishing Marginal Utility Diminishing means decreasing Marginal means additional Utility means satisfaction The law of diminishing marginal utility states: As a person consumes additional units of a good, eventually the utility gained from each additional unit of the good decreases.

Marginal is the economist’s word for additional. If we are at a certain point, and then we add more, the more is marginal. Utility means that something has value or use to us, that the something gives us satisfaction. So, the law of diminishing marginal utility says that as a person consumes additional units of a good, eventually, the utility gained from each additional unit of the good decreases.

The Law of Demand in Numbers and Pictures We can actually show how the law of demand works by listing prices and quantities demanded in a table, and by plotting those numbers in a graph. In economics, such a table is called a schedule and such a graph is called a curve. (See Transparency 4-3.) Since we’re looking at demand here, the table is a demand schedule and the graph is a demand curve. The demand curve is the line that connects the plotted points on the graph. In this example, the “curve” is actually a straight line.Transparency 4-3

Transparency 4-3: Demand in Tables and Graphs Demand curveDemand schedule

Do you see how the table works? At a price of $3, what is the quantity demanded? (Answer: Two.) What is the quantity demanded at $1? (Answer: Four.) Now look at the graph. At a price of $3, what is the quantity demanded? Find $3 on the vertical axis, and follow the dotted black line over to where it meets the solid red line, which is the demand curve. The place where the two lines intersect is point B. Follow the dotted black line from point B down to the horizontal axis. What is the quantity demanded? (Answer: Two, just as it was in the demand schedule.) Now find the quantity demanded at a price of $1. (Answer: Four.)

Individual and Market Demand Curves One final point: We can look at individual or market demand curves; these are different. An individual demand curve represents one person’s demand for a good. A market demand curve is the sum of all the individual demand curves for a good.