Transcript Demand

Demand
The laws of demand,
the determinants of demand,
demand schedules,
demand curves,
changes in quantity demanded,
changes in demand itself...
Wait—what IS demand?

Demand is how willing and able people are
to buy a product.

Demand is how willing and able people are
to buy a product.
Willing:
What would you be
willing to pay for
this bag of broken
glass!?
Um.... nothing?

Demand is how willing and able people are
to buy a product.
Able:
I'm selling a device
that can teleport
you anywhere
within 100 km in
four minutes!
AWESOME!!
It costs
$650,000,000,000!
Oh... never
mind.
Demand
What we just demonstrated was the law of
demand.


When the price goes up, the quantity
demanded (how many are willing and able
to buy it) goes down.
When the price goes down, the quantity
demanded goes up.
Mathematically,
Quantity Demanded = 1 / Price
(or, Price = 1 / Quantity Demanded)
Graphed, it looks something like this, right?
At about what price would there be
150 people who would want this
product?
If the product cost $16, about how many
people would buy it?
Demand
Aside from basic logic, there are a few fancy
specialized terms used to describe this law.
One of them is substitution.
Demand
Substitution: If one item becomes more
expensive, people buy a different item as a
substitute.
Wow, glue has
The price of this body wash
went up again... I think I'll
just buy this other brand of
body wash instead.
gotten really
cheap! I should
just use that
instead of tape.
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Another reason demand curves look like this:
is the real income effect.
If people earn more money and there is no
inflation, people spend more.
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The final and fanciest phrase used to explain
the law of demand is:
Demand
The final and fanciest phrase used to explain
the law of demand is:
Diminishing Marginal Utility
Demand
The final and fanciest phrase used to explain
the law of demand is:
Diminishing Marginal Utility
Diminishing: Getting smaller
Marginal: By increments (usually of one)
Utility: Usefulness
Demand
Everything that a person wants (or thinks they
want) has utility—it appears to offer some
kind of satisfaction.
This will make
you beautiful!
This will taste
good!
This will stop
your cough!
This will make
you a
professional
athlete!
Demand
However, in general, the more you have of
something, the less you need more of it.
Demand
However, in general, the more you have of
something, the less you need more of it.
For example:
Want a slice of
superfudge ice
cream cake?
YES.
Demand
However, in general, the more you have of
something, the less you need more of it.
For example:
Would you
like another
piece?
Want a slice of
superfudge ice
cream cake?
YES.
Sure!
Demand
However, in general, the more you have of
something, the less you need more of it.
For example:
Would you
like another
piece?
Want a slice of
superfudge ice
cream cake?
YES.
Sure!
Would you
like a third
piece?
No, that
would be a
terrible idea.
Demand
However, in general, the more you have of
something, the less you need more of it.
For another example:
Um, well, I guess
I could use a
second pair...
Would you
like a third?
Hello, I would
like this pair of
shoes.
Alright, would
you like a
second?
No, no I do not
need a third pair
of the same
shoes.
Demand
To summarize:
When price goes up, quantity demanded
goes down.
When price goes down, quantity
demanded goes up.
This is due to substitution, the real income
effect, and the law of diminishing marginal
utility.
Demand
What we have covered explains quantity
demanded as a function of price.
You may be wondering:
-Why is it called quantity demanded instead of
just demand?
-If we change the demand instead, will price
respond the same way?
-Does everything follow these laws?
Demand
What we have covered explains quantity
demanded as a function of price.
You may be wondering:
-Why is it called quantity demanded instead of
just demand?
-If we change the demand instead, will price
respond the same way?
-Does everything follow these laws?
Well, let's investigate.
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First, let's review the law:
When price goes up, quantity demanded goes
down; fewer people are willing and/or able to
buy that good.
When price falls, quantity demanded rises;
more people are willing and/or able to buy
that good.
Demand
Now, for the question you should always
consider:
Does this make sense? Does this sound
plausible?
Demand
Now, for the question you should always
consider:
Does this make sense? Does this sound
plausible?
The answer is:
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Now, for the question you should always
consider:
Does this make sense? Does this sound
plausible?
The answer is: No—
Not for everything!
Demand
Some goods are inelastic. When the price
changes, the quantity demanded does not
change very much.
On the other hand, some goods are very
elastic. Just as elastic is flexible, the
quantity demanded for these goods adjusts
easily to changes in price.
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Different products have different degrees of
elasticity.
Elasticity refers to how dramatically the
quantity demanded of a product changes
when the price changes.
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For further explanation:
http://www.reffonomics.com/TRB/chapter5/el
asticityofdemandpart5a.swf
Demand
One final point to consider: How quickly do
markets respond to changes in price?
For example, in the short term, gasoline is very
inelastic.
In the long term however, gasoline is rather
elastic.
Demand
So, that answers one question. You may still
be wondering:
-Why is it called quantity demanded instead of
just demand?
-If we change the demand instead, will price
respond the same way?
Demand
Keep in mind, a supplier cannot simply change
the demand for his or her good—therefore,
one cannot simply “change demand” directly.
A supplier only controls price, and that affects
only quantity demanded.
Changing demand itself works a bit differently.
Demand
For an explanation:
http://www.youtube.com/watch?v=3tybNSz7thI
Demand
Keep in mind, a supplier cannot simply change
the demand for his or her good—therefore,
one cannot simply “change demand” directly.
A supplier only controls price, and that affects
only quantity demanded.
Changing demand itself works a bit differently.
Let's look at an example!!
Demand
Demand Schedule for Sam Ples' Hot Dogs
Price
Quantity Demanded
$2.50
375
$2.75
360
$2.99
320
$3.25
300
$3.50
250
Demand
What could change this schedule?
-Substitution
-Complements
-Changes in population
-Changes in income
-Changes in tastes and preferences
Demand
What could change this schedule?
-Substitution
-Complements
-Changes in population
-Changes in income
-Changes in tastes and preferences
These are the determinants of demand.
Demand
What could change this schedule?
-Substitution
-Complements
-Changes in population
-Changes in income
-Changes in tastes and preferences
Let's consider these in turn.
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Substitutes!
I’m going to Sam's
for a hot dog! Want
to come along?
Nah, the taco place
one block down has
special deals going
on.
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Substitutes!
If the price of a substitute goes up, people will
buy less of the substitute.
If the price of a substitute goes down, people
will buy more of the substitute.
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Complements!
Complements: Items that go together.
Nothing's better than
one of Sam's hot
dogs with a side of
fries from Small
Fry's!
What!? Small Fry's prices
jumped 30%!? Forget that!
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Change in Population!
Simple: If there are more people, there are
more people to buy a product.
Why are so few people
buying my hot dogs!?
Well, for one thing, about
8% of the town's
population moved out
over winter.
Demand
Change in Income
Simple: If people make more money, they will
have more money to spend on your product.
Eight percent of the town
moved out?! Why?
They left because
average earnings
here have dropped
by 12%.
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Changes in Tastes and Preference
When the general public decides something is
fashionable, demand for the product goes up.
I heard that eating
kosher makes you live
longer!
I assume you heard
that from a reliable,
peer-reviewed
scientific source!
Forget hot dogs, let's
eat kosher!
Demand
These sound like intriguing and logical
considerations, but they'd be better with
graphs.
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Here is what Sam's demand schedule looked
like before as a graph:
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At $3, Sam was selling about 300 hot dogs.
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Now Sam's dogs got 200 customers at a price
of $2.75.
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Now Sam's dogs got 200 customers at a price
of $2.75.
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The demand schedule has shifted.
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In this case, the curve shifted to the left, meaning
there was a decrease in demand itself.
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When the determinants of demand change, the
quantity demanded at every possible price
changes with them.
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When the determinants of demand change, the
quantity demanded at every possible price
changes with them.
These are changes in demand.
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So remember, changing price changes the
quantity demanded.
Changing anything else changes the demand.
Do you not understand? Then let's practice!
Do you understand? Then prove it!