Demand Chapter 2 1

Demand analysis - intuition Marginal Cost/Marginal Benefit analysis of consumers If Marginal Benefit > Marginal Cost, buy it If Marginal Benefit < Marginal Cost, don’t buy it Marginal Benefit is reflected by what consumer is willing to pay. Marginal Cost is price of item. 2

Individual’s Demand for Gasoline (based on individual’s willingness to pay) Depends on, Individual’s Income Price of Gasoline Prices of Related Goods (automobiles, bus ticket, etc.) Individual’s Tastes/Preferences Individual’s expectation of future prices 3

Market Demand for Gasoline Obtained by summing all individual demands. Depends on, All factors that affect individuals’ demands Number of Individuals (population) 4

Graphing Demand The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded - fixing all the other factors that affect quantity demanded. The demand curve is the line relating price to quantity demanded - fixing all the other factors that affect quantity demanded. 5

Graphing Demand D Q=Quantity of Gas P=Price of Gas = $/Q 6

Law of Demand Is the relationship between price and quantity demanded positive or negative? Negative (Price and quantity demand move in opposite directions) Law of demand More of a good will be demanded, the lower its price. 7

Change in quantity demanded results from a change in price, all else equal shown as a movement along the demand curve 8

Change in demand results from a change in a factor other than price shown as a shift of the entire demand curve 9

Notation D=Demand Q D =Quantity Demanded 10

Example of Change in Demand due to income change Income Increases At every price, do people want to buy more or less? For Gasoline, More! Demand increases Shifts right D0D0 D1D1 11

Normal Good A good for which demand increases when income increases Examples: Premium Beers and wine Disneyland Gasoline Lego Robotic 12

Income Increases for an Inferior Good Inferior goods are goods where demand decreases when income increases. Examples: Pabst Blue Ribbon Beer Certain Products at Wal-Mart Generic Diapers Yugos (perhaps) 13

Income Increases for an Inferior Good Income Increases At every price, do people want to buy more or less? Less! Demand decreases Shifts left Q P D0D0 D1D1 14

Change in demand due to change in the price of a related good Substitutes Two goods that satisfy similar needs or desires Examples: Diet Pepsi and Diet Coke Strawberries and Raspberries Gasoline and Manual Lawn Mowers 15

Change in demand due to change in the price of a related good: Substitutes Price of a substitute good decreases Demand Decreases Shifts Left D1D1 Q P D0D0 16

Change in demand due to change in the price of a related good: Substitutes What happens if the price of a substitute increases? Demand Increases/Shifts Right 17

Change in demand due to change in the price of a related good: Complements Two goods that are used jointly in consumption. Examples: Tires and Gasoline Tires and Automobiles Beer and Pizza 18

Change in demand due to change in the price of a related good: Complements Price of a complementary good decreases Demand Increases Shifts right D1D1 Q P D0D0 19

Change in demand due to change in the price of a related good: Complements What happens if the price of a complement increases? Demand decreases/Shifts left 20

Change in demand due to... Tastes: ( Positive Change H demand increases H shifts curve right ( Negative Change H demand decreases H shifts curve left 21

Change in demand due to... Population... ( Increase H demand increases H shifts curve right ( Decrease H demand decreases H shifts curve left 22

Change in demand due to... Expected: ( Price Increase H demand increases H shifts curve right ( Price Decrease H demand decreases H shifts curve left 23

Change in demand results from a change in a factor other than price shown as a shift of the entire demand curve change in anything other than price 24

Demand = Willingness to Pay D Q=Quantity of Gas P=Price of Gas = $/Q P= Consumer Surplus (The value consumers get from a good but do not have to pay for.) 25

Demand Function for Good X Q D x = f(P x, P Y, M, H 1, H 2, …) where, P x is the price of good X, P Y is the price of good Y, M is income, H 1 is size of population, H 2 is consumers’ expectations,… On the prior graph for gasoline, Q D x = 10 - P x 26