[ 3.1 ] Fundamentals of Demand

Learning Objectives Understand how the law of demand explains the effects of price on quantity demanded. Describe how the substitution effect and the income effect influence decisions. Explore a demand schedule for an individual and a market. Interpret a demand graph using demand schedules.

[ 3.1 ] Fundamentals of Demand Key Terms Demand law of demand substitution effect income effect demand schedule market demand schedule demand curve

Demand Anyone who has ever shopped knows the difference between wanting to have something and being able to pay for it. Sometimes you can buy what you want, and sometimes the price is just too high.

Demand These people may have a desire to purchase the goods they see in the store window, but without the ability to pay for them, they do not generate true demand.

Demand The law of demand explains consumer reaction to price increases and decreases.

Demand When price changes, the substitution and income effects influence demand in different ways. Analyze Charts In what circumstance do the income and substitution effects lead to the same result?

Quiz: Demand If James and his friends experience the substitution effect, they will respond to a rise in the price of their favorite post-game snack by A. working extra hours to make more money. B. buying less of their favorite snack. C. buying more of their favorite snack. D. choosing another snack food instead of their favorite snack.

The Demand Schedule The law of demand, along with concepts such as the substitution effect and income effect, explains how the price of any item affects the quantity demanded of that item. Before we look at the relationship between price and the quantity demanded for a specific good, we need to look more closely at how economists use the word demand.

The Demand Schedule Both individual and market demand schedules record how changing prices affect quantity demanded.

Quiz: The Demand Schedule The owner of a sandwich shop surveyed her customers on how often they came in, which sandwiches they preferred, and what quantity of sandwiches they ordered. She then added up the quantities demanded by all her consumers at each price. What did she create? A. demand for sandwiches B. a market demand schedule C. the substitution effect D. an individual demand schedule

The Demand Graph What if you took the numbers in Ashley’s demand schedule in Figure 3.1 and plotted them on a graph? The result would be a demand graph, or curve. A demand curve is a graphic representation of a demand schedule.

The Demand Graph At this livestock auction, the law of demand is on clear display: As the price goes up, the number of willing buyers goes down, until finally there is only one bidder left.

The Demand Graph These graphs use the data from the individual and market demand schedules to show demand graphically.

Quiz: The Demand Graph The difference between a market demand curve and an individual demand curve is that the market demand curve A. provides data about only one consumer. B. is curved and not straight. C. provides data about many consumers. D. is usually much shorter than an individual demand curve.