Demand 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

Demand for Adam Humphrey’s Visa Service (based on individual’s willingness to pay) Depends on, Price of Service Individual’s Income Price Associated with Doing it at Burger King How much does the person really want to go to China or how big a hassle is it to come back. Number of Individuals going to Chinese Consulate for visa.

Demand for Adam Humphrey’s Visa Service

Market Demand for Adam Humphrey’s Visa Service Obtained by summing all individual demands. Depends on, All factors that affect individuals’ demands (price of service, income, price of related goods, tastes/preferences, expectation of future prices, etc.) Number of Individuals (population)

Individuals Can Demand Multiple Units

Example of Change in Demand due to Increase in Income Normal Good At every price people buy more so demand increases -shifts to right. Examples: 1. Adam Humphrey’s Service 2. i phones 3. Lego Robotics 4. Shrimp 5. Yachts 6. Red Haven Restaurant 7 D1D1

Example of Change in Demand due to Increase in Income Inferior Good At every price people buy less so demand decreases -shifts to left. Examples: 1. Generic Diapers 2. Bologna 3. Canned Beans 4. Ford Fiesta 5. Bus tickets 8 D1D1

Change in demand due to change in the price of a related good Substitutes Two goods that satisfy similar needs or desires Examples: Adam Humphrey’s Service and Burger King’s Internet Café Chicken Breasts and Chicken Wings Diet Coke and Diet Pepsi 9

Change in demand due to change in the price of a Substitute Price of a substitute good INCREASES - Demand Increases Shifts Right Example: Price of Diet Pepsi increases, Demand for Diet Coke increases D1D1 Q P D0D0 10

Change in demand due to change in the price of a Substitute Price of a substitute good DECREASES - Demand Decreases Shifts Left Example: Price of Diet Pepsi decreases, Demand for Diet Coke decreases D1D1 Q P D0D0 11

Change in demand due to change in the price of a Substitute Price of a substitute good INCREASES - Demand Increases Shifts Right Example: Price of Diet Pepsi increases, Demand for Diet Coke increases D1D1 Q P D0D0 12

Change in demand due to change in the price of a related good: Complements Two goods that are used jointly in consumption. Examples: Adam Humphrey’s Service and Airfare to China Hardware and Software Gasoline and GMC Yukons 13

Change in demand due to change in the price of a Complement Price of a complementary good INCREASES - Demand Decreases Shifts Left Example: Price of Hardware increases, Demand for Software decreases D1D1 Q P D0D0 14

Change in demand due to change in the price of a Complement Price of a complementary good DECREASES - Demand Increases Shifts Left Example: Price of Hardware decreases, Demand for Software increases D1D1 Q P D0D0 15

Demand = Willingness to Pay P=35 Consumer Surplus(The value consumers get from a good but do not have to pay for.)

What does the demand curve look like? Which demand below is for the more “price sensitive” product? How “price sensitive” are consumers to: Salt Cigarettes Gasoline Diet Coke i Phones Chipotle on Grand River 17 PP Q D1D1 Q D2D2

What determines price sensitivity/ price elasticity? Number of substitutes The more substitutes or the closer the substitutes, the… more elastic Time interval The longer time interval the… more elastic Share of budget The larger share of the budget the … more elastic Ex. Diet Coke Ex. Gasoline Ex. Salt 18