Demand

Factors that Determine Demand Demand is about consumers (Supply is about producers) Desire: Do I want it? Ability: Can I afford it? Willingness: Am I willing to buy it?

(KEH-teh-reese PARE-ree-boose) Law of Demand Ceteris Peribus (KEH-teh-reese PARE-ree-boose) “All other things being equal” When discussing the change of the price of one G&S, we assume that nothing else has changed. It’s like me saying “I’m retiring in 5 years, ceteris paribus.” As long as I don’t die first, or have to pay huge medical bills because one my sons actually “breaks a leg,” or some other event that would change my financial situation, that’s a true statement

The Law of Demand Consumers buy more of a G&S when its price decreases and less when the price increases. Duh!

Law of Demand Quantity of a good demanded varies inversely with its price Higher price = Lower quantity demanded Lower price = Higher quantity demanded PRICE DEMAND If, then

Showing Demand Two ways… Demand Schedule: listing of various quantities of a good demanded at all prices in the market at one time

Showing Demand Demand Curve (or Graph): A graph showing schedule

Showing Demand Individual vs. Market Schedule/Graph The first shows demand for one person for a G/S; the second shows demand for lots of people for a G/S Anne’s demand for pizza vs. Everyone’s demand for pizza

Demand curves always go Got it? Demand = Down and to the Right

$ Qty The Y axis is always price The X axis is always quantity Start numbering w/ zero Qty

c/o 2018 Satin Jackets 35 30 25 $ 20 15 10 5 1 2 3 4 5 6 7 Qty

Plot the following demand schedule for Class of 2018 satin jackets Price Quantity 35 30 1 25 2 20 3 15 4 10 5 6 7 N 2018

35 30 25 $ 20 15 10 D1 (or D1, or D1) 5 1 2 3 4 5 6 7 Qty

@ $20 @ $30 @ $5 3 jackets 1 jacket 6 jackets Plot the following points on your demand curve: @ $20 3 jackets @ $30 1 jacket @ $5 6 jackets

A change in price resulting in a change in the quantity demanded (CIQD) 35 30 25 $ 20 15 10 5 1 2 3 4 5 6 7 Qty

SHIFT HAPPENS $ Change happens here Qty and then here

Change in Demand (CID) Let’s say that teachers agree to give a 100 for a test grade if you wear the jacket on test days. More students would prefer jackets, right? Plot a new demand curve where five more jackets are demanded at each price. Label it D2 Price Quantity 35 5 30 6 25 7 20 8 15 9 10 11

35 30 25 $ 20 D2 15 10 5 D1 1 2 3 4 5 6 7 Qty

A change in demand (CID) will result in the entire curve shifting 35 30 25 $ 20 15 10 5 1 2 3 4 5 6 7 Qty

Change in Quantity Demanded vs. Change in Demand Change in the quantity demanded CQD Only the original curve Only the price changed As price changes, quantity demanded changes Change in demand CID There is a new curve Something other than price changed At the same price, demand changes

What Causes a Change in Demand? 5 Determinants of Demand Consumer income Consumer preferences Number of consumers changes Price of substitutes Consumer expectations WARNING! A new acronym is coming

Demand Curves OBJECTIVES 1. Define demand schedule and demand curve. 2. Construct a demand curve using hypothetical data. 3. Explain why consumers buy more of a good or service when the price decreases. 4. Explain the difference between a shift in the demand curve and a movement along the demand curve.

Label a graph like so… Price is always on the Y axis! .40 .35 .30 PRICE per Greebe .25 .20 .15 .10 .05 50 100 150 200 250 300 350 400 The Origin is always zero! Quantity is always on the X axis! QUANTITY (millions of Greebes)

Label a graph like so… Price is always on the Y axis! .40 .35 .30 PRICE per Greebe .25 .20 .15 .10 .05 50 100 150 200 250 300 350 400 The Origin is always zero! Quantity is always on the X axis! QUANTITY (millions of Greebes)

Demand for Greebes ™ ($ per Greebe™) (millions of Greebes™) $.10 350 .15 300 .20 250 .25 200 .30 150 .35 100 .40 50 This demand schedule shows the market demand for a hypothetical product: Greebes. Plot the demand for Greebes on the axes on your demand curve graph. Label the demand curve D.

.40 .35 .30 PRICE per Greebe .25 .20 .15 .10 D .05 50 100 150 200 250 300 350 400 QUANTITY (millions of Greebes)

1) At $0. 30 per Greebe, consumers would demand ______ million Greebes 1) At $0.30 per Greebe, consumers would demand ______ million Greebes. Ceteris paribus, if the price of Greebes increased to $0.40, consumers would demand _____ million Greebes. Such a change would be a decrease in _____ (demand or quantity demanded). Ceteris paribus, if the price of Greebes decreased to $0.20, consumers would demand _____Greebes. 150, 50, quantity demanded, 250

With an increase or decrease in the price of Greebes, there was a change in the quantity demanded. Using the same curve, you simply moved along the curve from one price/quantity combination. Now we’re going to look at how the whole curve will shift to the right or left representing a change in demand.

Greebe buyers now have less disposable income because of a increase in taxes. This change in the ceteris paribus conditions of the original demand for Greebes will result in a new set of data, shown on the following slide. Add the new demand curve on the same graph and label it D1.

Price Quantity Demanded ($ per Greebe) (millions of Greebes) $.05 300 .10 250 .15 200 .20 150 .25 100 .30 50

.40 .35 .30 PRICE per Greebe .25 .20 .15 .10 D .05 D1 50 100 150 200 250 300 350 400 QUANTITY (millions of Greebes)

Left, smaller, lower, increase, decreased 2) The change in the demand for Greebes results in a shift of the demand curve to the ___ (left or right). This indicates that at each of the possible prices shown, buyers are now willing to buy a ___ (smaller or larger) quantity; and at each of the possible quantities shown, buyers are willing to offer a ___ (higher or lower) price. The cause of this demand curve shift was a(n) ___ (increase or decrease) in tax rates that ___ (increased or decreased) the disposable income of Greebe buyers. Left, smaller, lower, increase, decreased

the change in the demand for Greebes results in a shift of the demand curve to the left. .40 .35 .30 PRICE per Greebe .25 .20 .15 .10 D .05 D1 50 100 150 200 250 300 350 400 QUANTITY (millions of Greebes)

Such a shift indicates that at each of the possible prices shown, buyers are now willing to buy a smaller quantity .40 .35 .30 PRICE per Greebe .25 .20 .15 .10 D .05 D1 50 100 150 200 250 300 350 400 QUANTITY (millions of Greebes)

The demand shifted to the LEFT The demand shifted to the LEFT. This means that the change in demand was a decrease. What does it mean if the demand curve shifts to the right?

Now, let’s suppose that there is a dramatic change in people’s tastes and preferences for Greebes. Add the new demand curve for Greebes and label the new demand curve D2.

Price Quantity Demanded ($ per Greebe) (millions of Greebes) $.20 350 .25 300 .30 250 .35 200 .40 150 .45 100 .50 50

.40 .35 .30 PRICE per Greebe .25 .20 D2 .15 .10 D .05 D1 50 100 150 200 250 300 350 400 QUANTITY (millions of Greebes)

Right, larger, higher, increase 3) Comparing the new demand curve (D2) with the original demand curve (D), we can say that the change in the demand for Greebes results in a shift of the demand curve to the ___ (left/right). Such a shift indicates that at each of the possible prices shown, buyers are now willing to buy a ___ (smaller/larger) quantity; and at each of the possible quantities shown, buyers are willing to offer a ___ (lower/higher) maximum price. The cause of this shift in the demand curve was a(n) ___ (increase/decrease) in people’s tastes and preferences for Greebes. Right, larger, higher, increase

The change in the demand for Greebes results in a shift of the demand curve to the right. .40 .35 .30 PRICE per Greebe .25 .20 D2 .15 .10 D .05 D1 50 100 150 200 250 300 350 400 QUANTITY (millions of Greebes)

at each of the possible prices shown, buyers are now willing to buy a larger quantity .40 .35 .30 PRICE per Greebe .25 .20 D2 .15 .10 D .05 50 100 150 200 250 300 350 400 QUANTITY (millions of Greebes)

offer a higher maximum price at each of the possible quantities shown, buyers are willing to offer a higher maximum price .40 .35 .30 PRICE per Greebe .25 .20 D2 .15 .10 D .05 50 100 150 200 250 300 350 400 QUANTITY (millions of Greebes)

The cause of this shift in the demand curve was an increase in people’s tastes and preferences for Greebes. Demand before Demand after

4) Ceteris paribus, which of the following would not cause a change in the demand (shift in the demand curve) for mopeds? (A) A decrease in consumer incomes (B) A decrease in the price of mopeds (C) An increase in the price of bicycles, a substitute for mopeds (D) An increase in people’s tastes and preferences for mopeds

4) Ceteris paribus, which of the following would not cause a change in the demand (shift in the demand curve) for mopeds? (A) A decrease in consumer incomes (B) A decrease in the price of mopeds (C) An increase in the price of bicycles, a substitute for mopeds (D) An increase in people’s tastes and preferences for mopeds

5) “Rising oil prices have caused a sharp decrease in the demand for oil.” Speaking precisely, and using terms as they are defined by economists, choose the statement that best describes this quotation. (A) The quotation is correct: An increase in price always causes a decrease in demand. (B) The quotation is incorrect: An increase in price always causes an increase in demand, not a decrease in demand. (C) The quotation is incorrect: An increase in price causes a decrease in the quantity demanded, not a decrease in demand. (D) The quotation is incorrect: An increase in price causes an increase in the quantity demanded, not a decrease in demand.

5) “Rising oil prices have caused a sharp decrease in the demand for oil.” Speaking precisely, and using terms as they are defined by economists, choose the statement that best describes this quotation. (A) The quotation is correct: An increase in price always causes a decrease in demand. (B) The quotation is incorrect: An increase in price always causes an increase in demand, not a decrease in demand. (C) The quotation is incorrect: An increase in price causes a decrease in the quantity demanded, not a decrease in demand. (D) The quotation is incorrect: An increase in price causes an increase in the quantity demanded, not a decrease in demand.

6) “As the price of domestic automobiles has inched upward, customers have found foreign autos to be a better bargain. Consequently, domestic auto sales have been decreasing, and foreign auto sales have been increasing.”Using only the information in this quotation and assuming everything else constant, which of the following best describes this statement? (A) A shift in the demand curves for both domestic and foreign automobiles (B) A movement along the demand curves for both foreign and domestic automobiles (C) A movement along the demand curve for domestic autos, and a shift in the demand curve for foreign autos (D) A shift in the demand curve for domestic autos, and a movement along the demand curve for foreign autos

6) “As the price of domestic automobiles has inched upward, customers have found foreign autos to be a better bargain. Consequently, domestic auto sales have been decreasing, and foreign auto sales have been increasing.”Using only the information in this quotation and assuming everything else constant, which of the following best describes this statement? (A) A shift in the demand curves for both domestic and foreign automobiles (B) A movement along the demand curves for both foreign and domestic automobiles (C) A movement along the demand curve for domestic autos, and a shift in the demand curve for foreign autos (D) A shift in the demand curve for domestic autos, and a movement along the demand curve for foreign autos