ECONOMICS : CHAPTER 4-- DEMAND Consumers What are they willing and able to buy at each possible price. Other-things-constant assumption: prices of other goods remain the same. Example: You may be able to buy a $75 pair of jeans, but are you willing to buy a $75 pair of jeans?

DEMAND, WANTS, NEEDS NOT THE SAME THING Example: You may want a $135,000 car but your demand at that price is 0. You may need a new computer because your old one won’t run some of your programs, but because of the price $800 you decide to make your old one work. If the price drops to $600 you may decide to buy one. NOW: your are willing and able to buy.

LAW OF DEMAND Quantity demanded varies inversely with price. Price Quantity demanded Price Quantity demanded

PRICING If a provider has a large supply and the demand is low the price will go down.

Substitution Effect CAUSED BY ….. SCARCITY The change in the relative price– price of one good relative to the prices of other goods Relies on other-things-constant assumption. Biggest cost of finding substitutes is time Example: You may want to go skiing but lift tickets are expensive, you have as much fun sledding so you go sledding.

INCOME EFFECT OF PRICE Change Fall in price increases quantity demanded also because you can buy more with your money income. Real Income: your income in terms of how many goods and services it can buy

Marginal Utility Satisfaction you get from an additional unit Example: You like chocolate cake. You eat your first piece of cake and it tastes great. Your second piece tastes good, your third and fourth pieces not so much. You don’t eat a fifth piece. Example: Buying another copy of the same book wouldn’t help you increase utility.

LAW OF DIMINISHING MARGINAL UTILITY As a person consumes more of an item per period the smaller the increase in utility becomes from consuming more. People decide what to buy based on the marginal utility. Think buying in bulk

LAW OF DIMINISHING MARGINAL UTILITY Helps explain why people buy more when the price decreases. (not law of demand) Example: I don’t own a cat, so cat food going on sale isn’t going to make me buy more cat food.

Demand Schedule Table of amount demanded at each price

Demand Curve Line showing quantities demanded at each price. Slopes downward: as price goes up quantity demanded goes down because the price and quantity are negatively correlated.

Individual Demand MARKET Demand Shows demand of individual consumer MARKET Demand Shows total quantity demanded per period for all consumers at a various prices.

ELACTICITY OF DEMAND Elasticity is another word for responsiveness Percentage change in quantity demanded Percentage change in price See p.108

Elasticity Values Three general categories: %change in quantity demand > % change in price elasticity is greater than 1.0 Demand is elastic: a % change in price will = a larger % change in quantity demanded. Quantity demanded is relatively responsive to a change in price. ( so price will matter)

Elasticity Values cont. If % change in quantity demand = % change in price elasticity is 1.0. = Unit Elastic (based on units) If % change in quantity demand < % change in elasticity is between 0 and 1.0 the demand is inelastic. (doesn’t matter)

Elasticity and Total Revenue Valuable to producers: indicates the effect a price change will have on how much consumers spend. Total Revenue = price * quantity demanded at that price

Elasticity cont. The more broadly a good is defined, the less substitutes there are and the less elastic the demand. For items with no substitutes: demand is mostly inelastic Household goods of the consumer budget are most price elastic.

Elasticity and time In the long run: elasticity of demand is greater because consumers have more time to adjust to a price change.

Change in Demand v. Shift in demand prices of other goods remain constant Change is movement along the curve: Change in quantity demanded Shift moves the entire curve rightward or leftward: Change in one of the determinants. Determinants of demand are factors that could affect demand.

Change in consumer income Movement along the curve means the income stays the same. If income increases: consumers may be willing and able to buy more. Quantity demanded is responsive to price

Rightward shift of demand curve Increase in demand that moves the curve to the right means people are willing and able to buy more.

Leftward shift Means consumers are not willing able to buy more of a good

Normal Goods v. Inferior goods When money increases demand for normal goods increases When money increases demand for inferior goods deacreases.

Change in price of related goods prices of other goods change Substitutes: products that can be used in place of each other. Change in price of substitutes can cause a shift in demand of the other item.

Substitutes Relatively cheaper If an increase in the price of one shifts the demand curve for the other rightward

Complements Items that are used in combination Diet Coke and Chocolate A decrease in the price of one increases the demand for the other

Change in size or composition of population Demand curve is sum of individual demand curve of all consumers in the market. If population grow—demand curves shift right.

Change in Consumer expectations Future income Future price of goods Change in those expectations can shift demand curve

Change in Consumer Tastes Tastes: likes and dislikes More people start preferring different items because of taste

Two component of Cost of Consumption Money price: demand because of benefits provided Pay more for items that you get more benefit from Time Price: willing to pay more for items that provide the same benefit but in less time.

Opportunity cost Shapes consumption patterns Not constant among all consumers