Chapter 3 Demand

Section 1-Understanding Demand Demand – willingness to purchase a specific item at a given price. Demand can be an ethical issue (i.e., sale of kidneys) Law of Demand – as the price of an item rises, the quantity demanded drops, and vice versa.

How to read a demand curve A demand curve is a graphic representation of a demand schedule (a table that lists the quantity of a good that a person will purchase at each price in a market) The graphs shows only the relationship between the price (Y-axis) of a good and the quantity (x-axis) someone is willing to purchase. There is an inverse relationship between price and quantity demanded. If P is up, QD is down; if P is down,QD is up. All demand curves are downward sloping to the right (remember the 2 “D’s” go together).

Demand (continued) Diminishing Marginal Utility? A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility (satisfaction) that person derives from consuming each additional unit of that product. It explains why there is a negative slope of the demand curve.

The Law of Demand is the result of two (2) separate behavior patterns and explains why consumers change their spending patterns 1) The Substitution Effect – consumers react to an increase in a good’s price by consuming less of it and more of substitutes that are less expensive Example: Jiffy peanut butter price ↑ Consumption of substitute increases ↑ 2) The Income Effect – consumers consume more or less based on their real income (real income is adjusted for inflation which reflects real purchasing power) Consumption of Jiffy and other goods ↓

Section 2–Change in Quantity Demanded Caused by a change in price Results in movement along the existing demand curve A B Changed the price from $1.00 to $1.50 Change the quantity demanded from 4 to 2 items Moved from point B to point A

Section 2–Shifts of the Demand Curve A demand curve is accurate only as long as there are no changes other than price that could affect the consumer’s decision (ceteris paribus) A shift of the demand curve is caused by a change in something other than the price (determinants) Results in movement of the entire curve Rightward shift represents an increase (D1 to D2) Leftward shift represents a decrease (D1 to D3) P D2 D1 D3 Q

T-R-I-B-E-(tastes and preferences, related goods, income, # of buyers, expectations) Increase in Demand Increase in income (I) Increase in the number of buyers (B) Decrease in availability of substitutes/Increase in the price of substitutes/decrease in price of complements (R) A new fad (T) (taste/preference) Consumer expectations(E) (expect prices to rise) Decrease in Demand Decrease in income Decrease in the number of buyers Increase in the availability of substitutes/decrease in price of substitutes/increase in price of complements Something is no longer in style Consumer expectations (expect prices to fall)

Related goods Substitutes-goods used in place of one another. Example: Jiffy peanut butter price ↑ Consumption of substitute increases ↑ Complements-two goods bought and used together Complement Example: Ski boots price ↑ Purchase of skis ↓

Normal vs. Inferior Goods Normal good – a good that consumers demand MORE of when their incomes increase (e.g., steak) Inferior good – a good that consumers demand LESS of when their incomes increase (e.g. macaroni and cheese)

Section 3 – Elasticity of Demand Elasticity of Demand (Responsiveness to a Price Change)– if I change the price of an item, what kind of an effect will it have on the quantity demanded Elastic Flat Steep P P Notice how flat this ELASTIC curve is. The price will have a lot of effect on the demand Notice how steep this INELASTIC curve is. The price will not have a lot of effect on the demand D Q Q Elastic

Factors Affecting Elasticity Responsive to a Price Change Has substitutes Luxuries Large % of budget Can postpone purchase Not in style Inelastic Unresponsive to a Price Change No good substitutes Necessities Small % of budget Cannot postpone purchase Fads