1. Demand

2. What is Demand? As we discussed earlier - there is a limited amount of goods out there. So how do we decide what we want? The concept of demand captures this issue. Demand is made up of two elements: –Desire for Goods and Services –Means to purchase those Goods and Services

3. Demand Schedules Lets consider how many Blue Ray DVD’s you might demand in a month. (This is called “Quantity Demanded”) We will first look at this information in a table called a “Demand Schedule” Demand Schedule - a table showing the relationship between the price of a good and the quantity demanded per period of time.

4. Demand Schedule

7. Law of Demand Law of Demand – If the price of a product increases, the quantity demanded will decrease (and vice versa).

8. Demand Schedules and Curves Another way of characterizing Demand instead of using a schedule is a Demand Curve. Demand Curve - a diagram showing the relationship between the price of a good and the quantity demanded per period of time.

9. Demand Curve

10. P($) Q d per month Note: ALWAYS label your axes!

11. Demand Curve P($) Q d per month 5 10 15 20 0 51015

12. Demand Curve P($) Q d per month 5 10 15 20 0 51015 A

13. Demand Curve P($) Q d per month 5 10 15 20 0 51015 A B

14. Demand Curve P($) Q d per month 5 10 15 20 0 51015 A B C

15. Demand Curve P($) Q d per month 5 10 15 20 0 51015 A B C D

16. Change in D vs. Change in Q d Change in Demand - a change in the desire or means to purchase the good, thus there is a change in quantity demanded at EVERY price. Change in Demand - a shift of the demand curve

17. Change in D vs. Change in Q d Changes in Demand Increase in demand - demand curve shifts to the right Decrease in demand - demand curve shifts to the left

18. Change in Demand Factors Which Cause a Change in Demand –Number of Buyers –Tastes and Preferences –Income –Price of Other Goods –The Availability of Credit –Expectations about Future Prices

19. Change in Demand - Number of Buyers The more buyers in the market for a good, the greater the total quantity demanded (by the whole economy) of the good at a given price. Since the quantity demanded is higher at every given price, the demand has increased. Likewise, if there are less buyers in the market there is less quantity demanded at every price, so demand has decreased.

20. Change in Demand - Tastes and Preferences Let’s say we find out watching Blue Ray DVD’s can improve your hearing, or what if suddenly Blue Ray becomes very fashionable to buy? If consumers prefer more, the demand for the good increases (a rightward shift of the demand curve). What if we find out Blue Ray DVD’s emit dangerous radiation? If consumers prefer less, the demand for the good decreases (a leftward shift of the demand curve).

21. Change in Demand - Income Let’s say that you graduate from McEachern and start making a substantial income. What might we expect to happen to the amount of Blue Ray DVD’s you would want to buy? –It would increase! You would be willing and able to purchase more DVD’s at every price. Thus we say that Demand increased.

22. Change in Demand - Income Let’s say that after a year at your new job the boss cuts salaries by 30%. What happens to Demand? –It would decrease. You are now have less means to purchase DVD’s at all prices.

23. Normal and Inferior Goods Given the information we have, we can say that DVD’s are a “normal good” Normal Good - any good which increases in demand as income increases (and vice-versa) Now let’s consider Macaroni & Cheese. A fine food that most college students partake in. What happens to your demand for Mac and Cheese when you get a job? –It probably goes down. You will buy better tasting and more healthy food.

24. Normal and Inferior Goods If your boss cuts your income, though you might start eating more Mac and Cheese. This means that Mac and Cheese is an “inferior good” Inferior Good - any good which decreases in demand as income increases (and vice-versa)

25. Change in Demand - Price of Other Goods What if a the price of “ON DEMAND HD” decreased? What would happen to the Demand for Blue Ray DVD’s? –The demand for Blue Ray would probably fall since people would be buying ON DEMAND instead.

26. Change in Demand - Price of Other Goods Thus an increase in the price of a substitute will increase the demand for the good And a decrease in the price of a substitute will decrease the demand for the good

27. Change in Demand - Price of Other Goods What if the price of Blue Ray Players goes up? What ought to happen to the demand for Blue Ray DVD’s? –It ought to go down.

28. Change in Demand - Price of Other Goods What if the price of Blue Ray Players goes down? –The demand for Blue Ray ought to go up, since more Blue Ray players are being used. This relationship between Blue Ray DVD’s and Blue Ray Players implies they are “complements.” Complement - a good which is consumed along with the consumption of another good

29. Change in Demand - Price of Other Goods Example - Peanut Butter and Jelly are complements. If price of peanut butter increases, consumers purchase less peanut butter Law of demand tells us this Result - Consumers purchase less jelly Since buy less peanut butter need less jelly for PB&J sandwiches

30. Change in Demand - Availability of Credit If it is easier to borrow money (credit cards have lower interest rates or are easier to obtain, etc.), do you think people will buy more or less of a good at a given price? –Probably more. Since people can buy things that couldn’t buy before, their means have (in a sense) increased. So an increase in the availability of credit will increase demand.

31. Change in Demand - Availability of Credit If it is harder to borrow money, what do you think will happen to the demand for Blue Ray? –It will probably decrease, since people will have less ability to buy Blue Ray.

32. Change in Demand - Expectations about Future Prices If we were to hear a new story about how Blue Ray prices were going to go up next month, would you buy that Blue Ray DVD you have had your eye on now or later? –Now. If you know prices will rise, you will want to buy more now, so you can avoid paying the higher price in the future. So demand will increase in response to this information

33. Change in Demand - Expectations about Future Prices Likewise, if we hear that Blue Ray prices are going to drop next month, what do we do now? –It is likely that we will buy less now, waiting to buy that new Blue Ray DVD until the prices fall next month, thus demand will decrease.

34. Change in Demand vs. Change in Quantity Demanded This is a very important distinction. In short - a change in demand is a shift in the WHOLE demand curve. People are willing to buy more (or less) at every price.

35. Change in Quantity Demanded Change in Quantity Demanded (  Q d ) - movement along a demand curve A change in quantity demanded can only be caused by a change in the price of the good. Changes in Quantity Demanded Increase in Q d - a movement to the right along a demand curve Decrease in Q d - a movement to the left along a demand curve

36. Increase in Demand

37. P QdQd

38. P QdQd D

39. P QdQd D

40. P QdQd D D’

41. Increase in Q d

42. P($) QdQd

43. Increase in Q d P($) QdQd D

44. Increase in Q d P($) QdQd D A

45. Increase in Q d P($) QdQd D A

46. Increase in Q d P($) QdQd D A B