Transcript The Law of Demand

The Basics of
Demand
The Basics of Demand

Economists study markets.
–

A market is any place where people come together
to buy and sell goods or services.
“Demand” - the willingness AND ability of
consumers to buy a good or service at a
specific period of time
–
–
Willingness: ready to buy a good or service
Ability: having the means to buy the good or service
The Law of Demand

Consumers buy more of a good when its
price decreases and less when its price
increases.
Price =
Quantity demanded
Price =
Quantity demanded
Substitution Effect

Take a cab vs. bus (books vs. magazines). These are
interchangeable. Substitute option will increase. Ex: when
gas prices increase, you will decide to take the bus. When gas
prices drop, you will drive your vehicle instead and ride the bus
less.
Good A
Good B
P QD
QD
P QD
QD
Diminishing Marginal Utility

Ex: you are so hungry that you eat 10
hamburgers. You will really enjoy that first
bite but each additional bite will give you
LESS satisfaction.
Question
How many
bottles of an
energy drink
would you buy
from the
school’s
bending
machine in a
week given the
current price of
$2.00?
Discussion




What did you notice?
Is there a pattern? If so, describe it.
What does the data tell us? Why do you
think this is so?
For those of you who would not purchase
any, why? What does this tell us about other
influences on economic decision making?
How We Look at Demand -- The
Demand Schedule and Curve

A schedule is a table that lists the
quantity of a good that a person
will purchase at each price. This
is the STORY.

The vertical axis ALWAYS shows
price

The horizontal axis ALWAYS
shows quantity demanded

Plot the points on the schedule

Connect the dots!!

The Demand curve slopes Down.

Now you have created a PICTURE
OF THE STORY.
P
D
Q
What is the difference between
demand and quantity demanded?

Demand is a schedule (the story) or curve (the
picture) that shows the various amounts of a
product that consumers are willing and able to
purchase at each of a series of possible prices
during a specified period of time
–

Example: Michael has a demand for ice cream. This means he has
the willingness AND ability to buy ice cream.
Quantity demanded refers to how many units will
be demanded at a particular price.
–
Example: Suppose the price of ice cream is $3 per cone and
Michael buys two. Therefore two ice cream cones is the quantity
demanded at $3.
Movement Along a Demand
Curve Versus a Shift of the Curve

Remember there is a difference between quantity
demanded and demand.

Markets never stand still, there are always outside
factors that change the actual price of the good or
how much is demanded altogether.

A change in price creates a change in the quantity
demanded, other things constant.
–

This causes a movement along the demand curve.
A change in one of the determinants of demand
causes a change in demand.
–
This causes a shift of a demand curve.
Change in Quantity Demanded
Price
Quantity
Practice Problem #1
What would happen to the demand of
bottles of an energy drink if the prices
doubled?
Increase or decrease in quantity
demanded (Qd)?

Answer to Practice Problem #1
What would happen to the demand
for energy drinks if the price
doubled?

Decrease in quantity demanded
How would it look on the graph?
Price
(P)
Quantity
(Q)
How would it look on the graph?
Price
(P)
Quantity
(Q)
Practice Problem #2
What would happen to the demand of
bottles of an energy drink if they went on
sale so that price per bottle decreased?

Increase or decrease in quantity demanded (Qd)?
Practice Problem #2
What would happen to the demand of
bottles of an energy drink if they went
on sale so that price per bottle
decreased?

Increase in quantity demanded (Qd)
How would it look on the graph?
Price
Quantity
How would it look on the graph?
Price
(P)
A
$1.00
B
$.50
D
0
4
8
12
16
Quantity
(Q)
Why do changes (Δ) in price cause
movement along the demand curve?
Price
(P)
Demand (D)
Quantity
(Q)