Demand P S D Q

Demand A relation between the price of a good and the quantity that consumers are willing and able to buy during a given period, other things constant. Willing: you want to buy the product Able: you can afford to buy the product

Demand Schedule and Curve Demand curve: a curve showing the relation between the price of a good and quantity demanded during a given period, other things constant. Suppose we are making pizza. Price of Good Quantity Demanded $3 200 $4 150 $5 100 $6 75 $7 50

Law of Demand States that a quantity of a good demanded during a given period relates inversely to its price, other things constant. Price increases  Quantity Demanded decreases Price decreases  Quantity demanded increases Creates a downward sloping demand curve

Why? Substitution Effect Unlimited wants/scarce resources When the price of a good falls, consumers substitute that good for other goods, which become relatively more expensive. Reverse also holds true

Why? Income Effect Money income: is simply the number of dollars received per period Real income: your income measured in terms of what it can buy. A fall in the price of a good increases consumers’ real income making consumers more able to purchase goods; for a normal good, the quantity demanded increases.

Demand Curve A curve showing the relation between the price of a good and the quantity demanded. Price $6 $5 Point on the line that matches the schedule Every point on the line matches the schedule. It is a price/quantity demanded that consumers are willing and able to buy. $4 $3 Demand Quantity 200 50 75 100 150

Movement Along the Demand Curve Caused by a change in price Only a change in price Move from one point to another on the same graph Called a Change in quantity demanded.

Movement along the Demand Curve Price B $6 $5 A Demand 75 100 Quantity

Demand Individual demand Market demand The demand of an individual consumer Market demand Sum of individual demands of all consumers in the market

Shifts in the Demand Curve A demand curve isolates the relation between prices of a good and quantities demanded when other factors that could affect demand remain unchanged. Factors called assumptions or determinants

Determinants of Demand Changes in consumer income Changes in prices of related goods Changes in consumer expectations Changes in the number or composition of consumers Changes in consumer tastes

Changes in determinants Results in changes to the RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED. At each and every price a DIFFERENT quantity is demanded. Results in a shift in the demand curve New curve must be drawn

Changes in Demand Increase in demand P Qd1 Qd2 $4 150 200 $5 100 $6 75 At each and every price MORE of the good is demanded Shifts to the right Price P Qd1 Qd2 $4 150 200 $5 100 $6 75 A B $5 D2 D1 Quantity 100 150

Causes for Increase in Demand Increase in consumer income Causes consumers to buy more of the product at each and every price. Normal goods Inferior goods

Change in consumer income Normal goods A good for which demand increases as consumer income rise Inferior goods A good which demand increases as consumer income falls

Changes in Price of Related Goods Substitutes Goods that are not consumed jointly Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward. Increase in price of Coke leads to increase in demand for Pepsi

Changes in Price of Related Goods Substitutes Suppose that the price of Coke rises from $1 to $1.50, then the demand for Pepsi will increase from 75 to 100. $1 D2 D1 75 100

Changes in the price of related goods Complements Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward Two goods that are consumed jointly. An decrease in the price of one will increase demand for the other

Changes in Price of Related Goods Complements A decrease in the price of DVD players, increases the demand for DVDs Suppose that DVD players decrease in price from $145 to $100, now the demand for DVDs will increase from 750 at $20 to 900. $20 D2 D 750 900

Changes in Consumer Expectations Such as expectations in Prices and income Affect how consumers spend their money and their demand If product cheaper today than tomorrow, then increase in demand

Changes in consumer tastes Consumer preferences likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.

Changes in taste Consumers prefer platform shoes. At $50, demand increases from 100 to 200. $50 D2 D 100 200

Change in the number and composition of consumers The market demand curve is the sum of the individual demand curves. If the number of consumers falls then the sum will be smaller thus shifting the demand curve

Changes in Demand Decrease in demand P Qd1 Qd2 $4 150 110 $5 100 90 $6 At each and every price Less of the good is demanded Shifts to the Left Price P Qd1 Qd2 $4 150 110 $5 100 90 $6 75 60 B $5 A D1 D2 Quantity 90 100

Causes of Decrease in Demand Decrease in consumer income Causes consumers to buy less of the product at each and every price.

Review of Demand A change in quantity demanded is not a change in demand Change in quantity demanded is caused by a change in price Change in quantity demanded is a movement along the demand curve Change is demand is caused by a change in the determinants Change in demand shifts the demand curve