Chapter 4- Microeconomics Demand

4/1 What is demand Objectives: 1. describe and illustrate the concept of demand explain how demand and utility are related Demand is based on desire, ability and willingness of people to buy a product. We compete with others who have similar demands Economists analyze demand by listing prices and desired quantities in a demand schedule (chart). When the demand data is graphed, it forms a demand curve with a downward slope.

Introduction Knowledge to understand HOW market work People and companies act in own self-interest Important for business to know what is in demand (what customers are willing and able to buy) Demand Schedule: list that shows quantities demanded at various prices Demand Curve – graph that reflects quantity demanded at each price level

Law of Demand Generally, quantity demanded varies inversely with its price Price up----- demand down Price down-----demand up Not always true***- examples Price is a barrier for people- higher the barrier, harder to reach. Normal behavior of people in daily life--- observe the increased traffic and purchase at stores and malls.

Demand and Marginal Utility: Extra satisfaction from one more unit (important concept to understand) Diminishing marginal utility-satisfaction is reduced with each added item= reluctance to pay more for added items When you reach the point where marginal utility is less than price- You stop buying Curve is in a downward motion

See page 93- Standard and Poor’s (housing)

Change in quantity demanded The change in quantity demanded shows a change in the amount of a product purchased when there is a change in price. The income effect means that as prices drop, consumers are left with extra real income. The substitution effect means that price can cause consumers to substitute one product with another similar but cheaper item.

Change in demand A change in demand is when people buy different amounts of the product at the same prices A change in demand can be caused by a change in income, tastes, a price change in related products (either because of a substitute or complement), consumer expectations and the number of buyers.

Demand Elasticity Read Setting prices on p 101 The extent to which a change in price causes a change in the quantity demanded In other words, does a change in price cause a large, small or proportional change in demand?

Determinants of Demand Elasticity Demand is elastic if the answer to the following questions are “yes”. Can the purchases be delayed? Some purchases cannot be delayed, regardless of price changes. Are adequate substitutions available? Price changes can cause consumers to substitute one product for a similar product. Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumer’s income.