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Ch. 4
Demand
Before we begin, there’s a couple
of important things to recall :
1. What is a “market”?
 A market is created when______
 Of their own free will, each side willingly ______
 Point #1:
The interaction b/t buyers and sellers
determines the price of most goods and how much will be
produced
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Recalling Adam Smith & the “invisible hand”
• Goods & services produced in a market
economy are the result of
Supply and Demand
– If people want (demand) a particular
good/service, someone will likely supply it
to make a profit
– So…let’s take a look at DEMAND
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What is “demand”??
• Demand exists ONLY when the following are
true:
1. Desire for the item
2. Ability to pay for it
3. Willing to pay for it
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The Law of Demand
• As the price of a good
increases, quantity
demanded decreases
• Similarly, as the price of a
good decreases, quantity
demanded increases
• In other words: when price
goes up, we buy less…when
price goes down, we buy more
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Price
QD
QD
Price
Why is this true?
• 2 separate behaviors overlap:
A. the substitution effect
and
B. the income effect
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The Substitution Effect
• occurs when we react to a price increase by
consuming less of that good… and more of other
goods that satisfy the same basic need
The Income Effect
• The qty of an item you consume changes if its price
changes but your income does not
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The Demand Schedule
• An individual demand schedule
is a table that lists the quantity
of a good a person will buy at
each different price.
• A market demand schedule is
a table that lists the quantity
of a good all consumers in a
market will buy at each
different price.
Demand Schedules
Individual Demand Schedule
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Market Demand Schedule
Price of a
slice of pizza
Quantity demanded
per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
Section
Price of a
slice of pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
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Quantity demanded
per day
300
250
200
150
100
50
The Demand Curve
• When reading a
demand curve,
assume all other
factors in the market
(income, population,
etc.) remain constant.
*
• *important point!
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Market Demand Curve
Price per slice (in dollars)
• A demand curve is a
graphical
representation of a
demand schedule.
3.00
2.50
2.00
1.50
1.00
Demand
.50
0
0
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50
100 150 200 250 300 350
Slices of pizza per day
Limits of a Demand Curve
• Can only be used to predict how people’s
buying habits might change when price and
ONLY price changes
• To put it another way:
A demand curve is accurate for 1
specific set of market conditions
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Now…it’s your turn:
Graphing a market demand curve:
• Horizontal axis shows quantity w/precise
labeling
• Vertical axis shows price w/precise labeling
• Label lines, not spaces
• Be consistent in your “scaling”
• Provide specific title
• Write clearly and neatly!
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Demand for Red Wine (bottles)
Price
Qty. Demanded
$15.00
100
$14.00
150
$13.00
200
$12.00
300
$11.00
400
$10.00
500
$ 9.00
700
$ 8.00
1,000
$ 7.00
1,400
$ 6.00
2,000
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Label your
demand curve
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Sec. 2
Shifts of the Demand Curve
Objectives: Sort out the following…
(not necessary to write these down!)
• What is the difference between a “change in quantity
demanded” and a “change in demand” ?
• What factors can cause a “change in demand” ?
• How does the change in the price of one good affect
the demand for a related good?
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Shifts in Demand
• Ceteris paribus is a Latin phrase economists use meaning “all other
things held constant.”
• A demand curve is accurate only as long as the ceteris paribus
assumption is true.
• If for some reason qty demanded at EACH and EVERY price
changes, the entire demand curve will shift (move) to the left or right
• When the ceteris paribus assumption is dropped, movement no
longer occurs along the demand curve. Rather, the entire
demand curve shifts.
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What Causes a Shift in Demand?
• Several factors can lead to a change in demand:
1. Income
Changes in consumers’ incomes affect demand:
“normal good”: a good consumers demand more of when their incomes increase.
“inferior good”: good that consumers demand less of when their income
increases.
2. Consumer Expectations
Whether or not we expect a good to increase or decrease in price in the future
greatly affects our demand for that good today.
3. Population
Changes in the size of the population also affects the demand for most products.
4. Consumer Tastes and Advertising
Advertising plays an important role in “helping us to know what we want” and
therefore influences demand
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Prices of Related Goods
The demand curve for one good can be affected by a
change in the demand for another good.
• Complements are two goods
that are bought and used
together.
• Substitutes are goods used in
place of one another.
Example:
Example:
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Major Health Story!
• It has just been proven that consuming red wine will
dramatically speed up the aging process. Studies
prove that those who drank 5 glasses of wine per week
with their dinner will shorten their lives by as much as
15 years.
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• How will this news affect the demand curve
for red wine???
(what will happen to the curve?)
• Now…construct a new demand curve for red wine
using the following figures:
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(label it D2)
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Demand for Red Wine (bottles)
Price
Qty. Demanded
$15.00
0
$14.00
50
$13.00
50
$12.00
100
$11.00
200
$10.00
300
$ 9.00
500
$ 8.00
800
$ 7.00
1100
$ 6.00
1600
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Label this
curve D2
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Sec. 3
Elasticity of Demand
• What is “elasticity” of demand?
• What factors affect elasticity?
• How does a business use elasticity
and total revenue to make
decisions?
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What Is Elasticity of Demand?
Elasticity of demand measures how much qty.
demanded changes when there is a change in price.
• The more demand
reacts to a
change in price,
the more
• Demand for a good that
doesn’t change much
despite a price change
is
Elastic
Inelastic
it is
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Factors Affecting Elasticity
• Several different factors can affect the elasticity of
demand for a certain good.
1. Availability of Substitutes
Few substitutes for a good? demand will not likely decrease as price
increases. The opposite is also usually true. (eg heart surgery)
2. Necessities versus Luxuries
Which would most likely be more elastic?
3. Relative Importance
How much of your budget you spend on the good? (eg: even if pepper
doubles in price, you likely do not buy more)
4. Change over Time
Demand sometimes becomes more elastic over time because people can
eventually find substitutes. (eg: gasoline)
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Elasticity and Revenue
The elasticity of demand determines how a change in
prices will affect a firm’s total revenue or income.
•
total revenue: total amount of money the company
receives from selling its goods or services.
• Firms need to be aware of the elasticity of demand for
the good or service they are providing.
• If a good has an elastic demand, raising prices may
actually decrease the firm’s total revenue.
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