 branch of economics that examines individuals’ choices concerning 1 product/firm/industry

 quantities (Q) of a good that consumers are willing and able to purchase at various prices (P) during a given period of time

 table listing the quantities demanded (Q D ) at various prices (P)

 graph of the relationship b/t the price (P) of a good and the quantity demanded (Q D )  D = demand  neg. slope  P = prices  Y-axis  Q = quantities  X-axis

 the Q D of a good will be greater at lower P than will the Q D at higher P (ceteris paribus)  inverse relationship b/t P and Q

1. diminishing marginal utility 2. income effect 3. substitution effect

 utility: amt. of satisfaction one receives from consuming a good  total utility (TU): total amt. of satisfaction from consuming an amt. of goods  marginal utility (MU): amt. of satisfaction from consuming 1 more unit of a good

 as additional units of a product are consumed, the additional satisfaction starts to 

Packets of crisps TU in utils Utility (utils) Packets of crisps consumed (per day)

Packets of crisps TU in utils Utility (utils) Packets of crisps consumed (per day) TU

Packets of crisps TU in utils MU in utils Utility (utils) Packets of crisps consumed (per day) TU

Packets of crisps TU in utils MU in utils Utility (utils) Packets of crisps consumed (per day) TU MU MU = ΔTU/ ΔQ

 the less of something you have, the more satisfaction you gain from each additional unit  MU you gain from that product is higher  you have  willingness to pay more for it  P are lower at higher Q D because your additional satisfaction diminishes as you demand more

 effect that  or  P has on buying power of income  P  = buying power  (income seems  )  P  = buying power  (income seems  )

 the change in the mix of goods purchased as a result of  or  relative prices  substitute: good that can be substituted for another  butter vs. margarine  coffee vs. tea  perfect substitute: red pencil vs. yellow pencil

 Example: If P of butter , you will buy margarine instead. Q D of butter .

 market demand schedule/curve: P and Q D for all consumers of a good combined (the market)  same principles apply to market as individuals

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 Market demand (tonnes 000s) 700 A Point A Demand

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABAB Point A B Demand

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCABC Point A B C Demand

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCDABCD Point A B C D Demand

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCDEABCDE Point A B C D E Demand

 change in quantity demanded (ΔQ D )  due to changes in:  price  results in:  movement along the demand curve  change in demand  due to changes in:  nonprice determinants  results in:  demand curve shift

INCREASE = shift to RIGHTDECREASE = shift to LEFT

1. Income 2. Tastes & preferences 3. Prices of related goods 4. Expectations of future prices 5. Population size

 inferior goods: demand  as personal income  (“Spam effect”)  normal goods: demand  as personal income 

…what happens to your demand for filet mignon?

… what happens to their demand for filet mignon? … for Spam?

The “Friends” Haircut Hybrids, especially the Toyota Prius

 substitutes  goods that can replace one another  butter vs. margarine  price change for one leads to a shift in the same direction in the demand for the other  perfect substitutes: red pencils vs. yellow pencils  complements  goods that are used together  peanut butter & jelly  price change for one leads to a shift in the opposite direction in the demand for the other  perfect complements: right shoes and left shoes

… what happens to demand for margarine?

… what happens to demand for jelly?

 future ΔP and current ΔD move in the same direction  Ex. speculative buying. Google stock?  H 2 0 before a hurricane

 pop.   D   pop.   D  Ex. baby boomers hit retirement   demand for health care services

 responsive of consumers’ Q D to price changes  price elasticity of demand = %ΔQ D / %ΔP  %ΔQ D = |Q 2 – Q 1 | / Q 1  %ΔP = |P 2 – P 1 | / P 1

> 1price elastic (responsive) < 1price inelastic (not very responsive) = 1unitary elastic

 Let’s say that flat screen TVs normally cost $300, and demand is 2,000 per month.  Manufacturers reduce prices to $250. Consumption increases to 2,500 per month.  price elasticity = |2,500 – 2,000| / 2,000 |250 – 300| / 300 = 25% / 16.7% = 1.50 (price elastic)

 In April, gas cost $3 per gallon, and demand was 10,000 gallons per day.  In May, gas rose to $3.50 per gallon, and demand slipped to 9,750 gallons per day.  price elasticity = |9,750 – 10,000| / 10,000 |3.50 – 3| / 3 = 2.5% / 16.7% = 0.15 (price inelastic)

1. ability to substitute  more substitutes = more elastic 2. proportion of budget spent on good  more expensive item = more elastic 3. length of time to permit changes  more time = more elastic

Gasoline is inelasticRestaurant meals are elastic

InelasticEstimated Elasticity of Demand Salt; matches; airline travel, short-run0.1 Gasoline0.2 (short-run), 0.7 (long-run) Physician services0.6 Approximately Unitary Elasticity Movies0.9 Private education1.1 Tires, long-run1.2 Elastic Restaurant meals2.3 Airline travel, long-run2.4 Fresh tomatoes4.6 Source:

 total amount of money a company receives from sales of a product  TR = P x Q

 Edie’s Little Bakeshop sells scones for $1.50 each and sells 600 per month. What is her total revenue?  TR = P x Q = ($1.50)(600) = $900

 price change has effect on total revenue  typical goal: price change should not decrease total revenue Elastic DemandInelastic Demand  P   TR  P   TR  P   TR  P   TR

Should manufacturers reduce the price to $250?  TR 1 = ($300)(2,000) = $600,000  TR 2 = ($250)(2,500) = $625,000 YES, because total revenue increases.