Demand Function

What Factors Affect Buying and Selling?

Defining Demand Demand is the amount of a good or service that is bought at a particular price over a particular time period. (Supply is the amount of a good or service which a seller is willing to provide at a particular price over a particular time period.)

Price (P) For most goods, when price rises, the quantity demanded falls. People buy more at lower prices, less at higher prices

Graphing Demand We can graph demand by comparing price to quantity demanded Axes: Price and Quantity Curve shows all the possibilities, ceteris paribus, of price and quantity If the price changes, we can use the curve to learn the new quantity

Graphing Demand Be sure to label both axes and the curve We usually use a straight line for Demand, but in reality it can be curved Quantity Price D

Shifting Demand If anything other than price changes, we must shift the curve left of right We call this shifting “increasing” or “decreasing” demand “Demand” is the whole curve; a specific spot on the curve tells us the “quantity demanded” Quantity Price D

Substitutes (S) Demand changes when the price of substitute products change Example: what happens to demand for apples when prices for pears increase? If the price of a substitute increases, demand increase; if price of substitute falls, demand falls Note the title, arrow, and subscripts to show the shift Quantity Price D2D2 D1D1 Effect of Pear Prices on Apples

Complements (C) Demand changes when the price of complement products change Example: what happens to demand for Oreos when the price of milk increases? If the price of a complement increases, demand decreases; if price of complement falls, demand increases Quantity Price D1D1 D2D2 Effect of Milk Prices on Oreos

Household Income (Y) Demand changes when household income changes Example: what happens for demand for iPods when households earn more money? For “normal goods,” demand rises with income For “inferior goods,” demand falls with income What are examples of infer Quantity Price D2D2 D1D1 Effect of Rising Income on iPods

Other Factors Other factors affect demand, but less commonly than Price, Substitutes, Complements, and Income: –Changes in cultural preference –Weather –Advertising –Size of population

QD x = f P x P S P C Y f denotes a function Exact effects of the comp- onents not stated explicitly Reminds us to consider all the variables Could be evaluated with statistics, probabilities, and human analysis Exact function probably cannot be determined for any product, but we can get close Often we use only price, QDx = fPx

Example: Granola What are substitutes for granola? What are complements for granola? Show the effects of a fall in the cost of milk on granola demand Show the effects of a drop in price of Super Healthy Whole Wheat Cap’n Crunch on granola demand Show the effects on granola demand of Jennifer Aniston appearing in a movie eating granola