Chapter 3

Demand Demand (D) is the amount of a good or service a consumer is willing and able to purchase at various prices during a given period of time. Demand (D) is the amount of a good or service a consumer is willing and able to purchase at various prices during a given period of time. W + A = D

Quantity Demanded (QD) is the amount of a good or service a consumer is willing and able to purchase at each price during a given period of time. Quantity Demanded (QD) is the amount of a good or service a consumer is willing and able to purchase at each price during a given period of time.

What is the difference between D and QD? What is the difference between D and QD? D measures W + A at various prices. D measures W + A at various prices. QD measures W + A at one (particular) price. QD measures W + A at one (particular) price.

The Law of Demand When the price of a good or service increases, the quantity demanded decreases. When the price of a good or service increases, the quantity demanded decreases. When the price of a good or service decreases, the quantity demanded increases. When the price of a good or service decreases, the quantity demanded increases. This is an inverse (opposite) relationship. This is an inverse (opposite) relationship.

Demand Schedule Illustrates the relationship between the price of a good or service and the quantity demanded for the good or service. Illustrates the relationship between the price of a good or service and the quantity demanded for the good or service. Shows the law of demand. Shows the law of demand.

Price Per Car Quantity Demanded $10, $8, $6, $4, $2,

A demand graph is a graphic illustration of the demand schedule. A demand graph is a graphic illustration of the demand schedule. A demand curve plots the information from the demand schedule on to the demand graph. A demand curve plots the information from the demand schedule on to the demand graph. Each plotted point on the graph represents a specific combination of price and quantity demanded. Each plotted point on the graph represents a specific combination of price and quantity demanded. The demand curve slopes downward, right. The demand curve slopes downward, right.

P QD 1,000 4,000 6,000 10,000 8,000 2,000 1,2001,5003,0005,000 0 Price Per Car Quantity Demanded $10, $8, $6, $4, $2, D

Examples of the Law of Demand The Income Effect The Income Effect 1. Purchasing Power - The amount of money one has available to spend on goods and services. 2. Any change in a consumers’ purchasing power which is caused by a change in price 3. The income effect may not always apply.

The Substitution Effect The Substitution Effect Substitute goods - Goods that can be used in place of one another. Substitute goods - Goods that can be used in place of one another. Consumers tend to substitute a similar, lower- priced good for another good that is higher-priced. Consumers tend to substitute a similar, lower- priced good for another good that is higher-priced. The substitution effect may not always apply. The substitution effect may not always apply.

Diminishing Marginal Utility Diminishing Marginal Utility Utility - Usefulness or satisfaction gained from the consumption of a good or service. Utility - Usefulness or satisfaction gained from the consumption of a good or service. With each additional unit of consumption of a good or service, less satisfaction from each unit of consumption will be received. With each additional unit of consumption of a good or service, less satisfaction from each unit of consumption will be received.

Demand will decrease because at some point, consumers cannot use any more of a good or service. Demand will decrease because at some point, consumers cannot use any more of a good or service.

Demand Shifts With the passage of time, factors other than price (non-price factors) can affect demand for a good or service. With the passage of time, factors other than price (non-price factors) can affect demand for a good or service. The result of non-price factors affecting demand is that the entire demand curve shifts either to the right or to the left. The result of non-price factors affecting demand is that the entire demand curve shifts either to the right or to the left.

This means that quantity demanded changed at every price. This means that quantity demanded changed at every price. P PQ

An INCREASE in demand shifts the entire demand curve to the RIGHT. An INCREASE in demand shifts the entire demand curve to the RIGHT. A DECREASE in demand shifts the entire demand curve to the LEFT A DECREASE in demand shifts the entire demand curve to the LEFT

There are five non-price factors which determine demand for a good or service: There are five non-price factors which determine demand for a good or service: 1. Consumer Taste and Preference 2. Market Size 3. Income 4. Prices of Related Goods 5. Consumer Expectations

Consumers’ taste and preference for comfort, quality, trends, holidays, seasons, etc. can have an effect on demand Consumers’ taste and preference for comfort, quality, trends, holidays, seasons, etc. can have an effect on demand

Market Size Changes in the size of the market can have an effect on demand. Changes in the size of the market can have an effect on demand. Three factors can change market size: Three factors can change market size: 1. Decisions made by private businesses 2. Government policies 3. New technology

Income Changes in consumers’ income can have an effect on demand. Changes in consumers’ income can have an effect on demand.

Prices of Related Goods The demand for a good or service can be affected by the prices of related goods The demand for a good or service can be affected by the prices of related goods Two types of related goods: Two types of related goods: 1. Substitute goods are goods that can be used to replace a similar good 2. Complementary goods are goods that are usually used together

Consumer Expectations Expectations of one’s future income can have an effect on demand. Expectations of one’s future income can have an effect on demand.

Elasticity of Demand The degree to which changes in good’s price affect the quantity demanded by consumers. The degree to which changes in good’s price affect the quantity demanded by consumers. Exist when small change in a good’s price causes a major, opposite change in quantity demanded Exist when small change in a good’s price causes a major, opposite change in quantity demanded Can change if: Can change if: The product is not a necessity The product is not a necessity There are readily available substitutes There are readily available substitutes The product’s cost represents a large portion of consumer’s income The product’s cost represents a large portion of consumer’s income

Inelastic Demand Exist when a change in a good’s price has little impact on the quantity demanded Exist when a change in a good’s price has little impact on the quantity demanded Can change if Can change if The product is a necessity The product is a necessity There are few or no readily available substitutes for the product There are few or no readily available substitutes for the product Product cost represents a small portion of consumers income Product cost represents a small portion of consumers income

Measuring Elasticity Total-revenue test – refers to the total income a business receives from selling its products. Total-revenue test – refers to the total income a business receives from selling its products. Monitoring changes in prices before & after – determines elasticity of demand for a product. Monitoring changes in prices before & after – determines elasticity of demand for a product. Prices can make inelastic or elastic Prices can make inelastic or elastic