Chapter 4 - Demand What is Demand? Law of Demand Determinants of Demand Demand v. Quantity Demanded Elasticity of Demand

DEFINITION: Demand: Displayed as a schedule or curve The curve or schedule shows the relationship between price and quantity:  the quantity consumers are willing and able to buy  at each of a series of prices

The Market System  Market consists of: Consumers - create a demand for a product  Demand the amount consumers desire to purchase at various prices Not what they will buy, but what they would like to buy!  Effective demand – must be willing AND able to pay

Individual and Market Demand  Market demand – consists of the sum of all individual demand schedules in the market  Represented by a demand curve  At higher prices, consumers generally willing to purchase less than at lower prices  Demand curve – negative slope, downward sloping from left to right

Law of Demand: As price increases, quantity demanded decreases.  Assumption: everything else remains equal  Inverse relationship between price & quantity  Results in a downward sloping curve

Demand Curve:

Case Study: Black Logo Hats Red hats with a unique black logo are currently fashionable on campuses across North America. Following is the demand schedule for these hats: Price Quantity Demanded per Week $10 10 thousand $ 9 12 thousand $ 8 13 thousand $ 7 14 thousand QUESTION: 1. Draw the demand curve for Black Logo hats.

Case Study: Answer #1

Determinants of Demand: Demand Shifters: 1. Buyers’ Incomes Increased incomes = increased demand More buyers = increased demand 2. Buyers’ Preferences Stronger preference = increased demand 3. Buyers’ Expectations If price increase expected, buy sooner (increased demand) If price decrease expected, buying delayed (decreased demand)

Determinants of Demand (cont’d): Demand Shifters: 4. Price of Substitutes Price of coffee increases, demand for coffee decreases BUT demand for tea increases Coffee and tea are substitute goods 5. Price of Complementary Goods Price of coffee increases, demand for coffee decreases AND demand for donuts decreases Coffee and donuts are complementary goods

Change in Demand:

Demand v. Quantity Demanded: Change in Demand: Caused by change in one or more determinants of demand Shifts entire demand curve Change in Quantity Demanded: Caused by change in price Movement from one point to another along an existing demand curve

Case Study: Black Logo Hats Price Quantity Demanded per Week $10 10 thousand $ 9 12 thousand $ 8 13 thousand $ 7 14 thousand 2. (a) If the price were to increase from $8 to $10, the quantity demanded would ______________ from ______ thousand to ______ thousand. (b) What two factors would explain why the amount purchased has changed in response to the price increase in (a)? (c) What are consumers' two basic alternatives to paying the higher price?

Case Study: Black Logo Hats 3. Indicate whether each of the following situations would cause the demand curve for Black Logo hats to shift to the right, shift to the left, or remain unchanged. _____ (a) An increase in the income of the buyers of such products. _____ (b) The rising popularity of blue hats worn by members of a new rock group. _____ (c) Reports that some stores are sold out of Black Logo hats, due to a shortage of black material. _____ (d) An increase in the price of Black Logo hats.

Case Study: Answers 2. (a) If the price were to increase from $8 to $10, the quantity demanded would decrease from 13 thousand to 10 thousand. (b) Some people are unable to pay the higher price, and some are unwilling to pay it. (c) Consumers can buy a substitute or "do without" it (buy less of it, or even none). 3. (a) shift to the right -- an increase in demand. (b) shift to the left -- a decrease in demand. (c) shift to the right -- an increase in demand. (d) no shift in the curve; rather, a movement along the curve to a point at which the price is higher and the quantity demanded is lower.

DEFINITION: Elasticity of Demand: A measure of how much quantity demanded changes in response to a change in price.

Demand is ELASTIC if: A change in Price causes buyers to make large changes in the Quantity they purchase. Buyers can easily switch to a substitute, OR Buyers can easily do without the product A price increase causes a reduction in total sales revenue. Large drop in quantity causes total sales to drop. PRICEQUANTITYTOTAL REVENUE $ ,000 $10,000 $2.00 4,000 $ 8,000

Demand is INELASTIC if: A change in Price causes buyers to make small changes in Quantity purchased. No close substitutes are available, AND Buyers unable or unwilling to do without the product A price increase causes an increase in total sales revenue. Small drop in quantity causes total sales to increase. PRICEQUANTITYTOTAL REVENUE $ ,000 $10,000 $2.00 6,000 $12,000

Unitary (Unit) Elasticity: A price increase causes no change in total sales revenue. Increase in price is exactly offset by decrease in quantity. PRICEQUANTITYTOTAL REVENUE $ ,000 $10,000 $2.00 5,000 $10,000

DEFINITION: Elastic Demand: Where a price increases causes a reduction in total sales revenue. Inelastic Demand: Where a price increases causes an increase in total sales revenue.

Case Study: Black Logo Hats Price Quantity Demanded per Week $10 10 thousand $ 9 12 thousand $ 8 13 thousand $ 7 14 thousand 4. (a) Is the demand for Black Logo hats elastic or inelastic over the price ranges shown? $7 to $8: _____________________________ $8 to $9: _____________________________ $9 to $10: _____________________________ (b) What could explain any change in the elasticity of demand as the price increases?

Case Study: Answers 4. (a) From $7 to $8 – inelastic: total revenue increases from $ to $ From $8 to $9 – inelastic: total revenue increases from $ to $ From $9 to $10 – elastic: total revenue decreases from $ to $ (b) The most likely explanation is that as the price gets higher and higher, buyer resistance increases, making demand more elastic. At higher prices, there may be more substitutes available. Also, some buyers may be unable to afford the higher prices.

Coefficient of Elasticity: A measure of the responsiveness of buyers to a change in price. If E d is greater than 1, demand is elastic If E d is less than 1, demand is inelastic If E d is = 1, demand is unitary

Price Elasticity of Demand: CALCULATING COEFFICIENT OF ELASTICITY: E d = % change in Q % change in P % change in Q = Q2–Q1 (Q2+Q1)/2 % change in P = P2–P1 (P2+P1)/2