Transcript Chapter 3- Presentation 1

Chapter 3- Presentation 1
Demand
Law of Diminishing Marginal Utility
• Each buyer of a product will get less utility
from each extra unit consumed
• Consumers will only buy more units if the
prices become progressively cheaper
• Ex- the 4th Big Mac will give less
satisfaction than the 3rd, 2nd, 1st
Demand
• A schedule or curve that
shows how much of a product
that consumers are willing and
able to purchase at a each of a
series of possible prices at a
specified period of time
Quantity Demanded
• The amount of a good or
service that buyer(s) want to
purchase at a particular
price during some time
period
Law of Demand
• Ceteris Paribas, as price falls, the quantity
demanded rises, and as the price rises,
the quantity demanded falls.
• ***inverse relationship between price and
quantity demanded
• Ex- if the price of Nike goes up, and
Adidas and Reebok stays the same, less
Nikes will be purchased
Individual Demand
Remember- Demand goes Down
P
6
P
$5
Qd
10
4
20
3
35
2
55
1
80
5
Price (per bushel)
Individual
Demand
4
3
2
1
0
D
10
20
30
40
50
60
70
80
Quantity Demanded (bushels per week)
Q
Individual
Demand
Demand Can Increase or Decrease
An Increase in Demand
Means a Movement
of the Line
P
6
P
$5
Qd
10
4
20
3
35
2
55
1
80
5
Price (per bushel)
Individual
Demand
A Movement Between
Any Two Points on a
Demand Curve is
Called a Change in
Quantity
Demanded
4
3
2
1
0
D2
Decrease in Demand
2
4
6
8
10
D1
D3
12
14
16
18 Q
Quantity Demanded (bushels per week)
Explanations for the Law of
Demand
• 1. Common sense- the lower the price, the more
people will buy (hence clearance sales)
• 2. Diminishing Marginal Utility
• 3. Income and Substitution Effects
Income Effect
• A lower price increases the
purchasing power of a buyer’s
income
• A higher price has the opposite
effect
Substitution Effect
• At a lower price, buyers will substitute a
good in exchange for the higher priced
alternative and vice versa
• Ex- If the price of chicken lowers, the
buyer will buy less beef, pork etc.
http://www.reffonomics.com/TRB/
chapter4/quantitydemanded.swf
Quantity Demanded v Demand
Market Demand
• Assume all the buyers in a market
are willing and able to buy the
same amounts of a product at
each of the possible prices
• ***adding/multiplying the
individual quantities demanded
Changes in Demand
• A new demand curve is
drawn
• Shift to the left for a
decrease and right for an
increase in demand
Determinants of Demand
•
•
•
•
•
•
Changes In: TRIBE
T- Tastes
R- Related Goods’ Price
I- Income of Buyers
B- # of Buyers
E- Expectations of the Future
Normal (Superior) Goods
• As income increases, consumers buy
more of a good
• Direct relationship
• Ex- steaks, luxury cars
Inferior Goods
• As income increases, demand for the
goods falls
• Inverse relationship
• Ex- Ramen noodles, cheap beer, retread
tires
Substitute Goods
• one that can be used in place of
another good
• An increase in the price of one good
will increase the demand of its
substitutes and vice versa
Complementary Goods
• One good that is used together with
another good
• If the price of one goes up, the demand for
the complement will decline and vice versa
• Ex- Peanut butter and Jelly, tuition and
textbooks