Transcript Demand Schedules and Demand Curves (Section 6.1)

DEMAND
DEMAND SCHEDULES AND DEMAND CURVES
(SECTION 6.1)
WHAT IS MICROECONOMICS?

branch of economics that examines individuals’
choices concerning 1 product/firm/industry
WHAT IS DEMAND?

quantities (Q) of a good that consumers are
willing and able to purchase at various prices
(P) during a given period of time
WHAT IS A DEMAND SCHEDULE?

table listing the quantities demanded (QD) at
various prices (P)
WHAT IS A DEMAND CURVE?
graph of the relationship b/t the price (P) of a
good and the quantity demanded (QD)
 D = demand

 neg.

slope
P = prices
 Y-axis

Q = quantities
 X-axis
THE LAW OF DEMAND
(SECTION 6.2)
WHAT IS THE LAW OF DEMAND?
the QD of a good will be greater at lower P than
will the QD at higher P (ceteris paribus)
 inverse relationship b/t P and Q

WHY IS THE LAW OF DEMAND TRUE?
1.
2.
3.
diminishing marginal utility
income effect
substitution effect
1. DIMINISHING MARGINAL UTILITY
WHAT IS UTILITY?
utility: amt. of satisfaction one receives from
consuming a good
 total utility (TU): total amt. of satisfaction from
consuming an amt. of goods
 marginal utility (MU): amt. of satisfaction from
consuming 1 more unit of a good

WHAT IS DIMINISHING MARGINAL UTILITY?

as additional units of a product are consumed,
the additional satisfaction starts to 
16
DARREN’S
UTILITY FROM CONSUMING CRISPS
(DAILY)
14
Utility (utils)
12
10
8
6
4
Packets
of crisps
TU
in utils
0
1
2
3
4
5
6
0
7
11
13
14
14
13
2
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
6
16
DARREN’S
UTILITY FROM CONSUMING CRISPS
(DAILY)
TU
14
Utility (utils)
12
10
8
6
4
Packets
of crisps
TU
in utils
0
1
2
3
4
5
6
0
7
11
13
14
14
13
2
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
6
16
DARREN’S
UTILITY FROM CONSUMING CRISPS
(DAILY)
TU
14
Utility (utils)
12
MU
Packets
TU
of crisps in utils in utils
10
0
1
2
3
4
5
6
8
6
4
7
4
2
1
0
-1
0
7
11
13
14
14
13
2
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
6
16
DARREN’S
UTILITY FROM CONSUMING CRISPS
(DAILY)
TU
14
Utility (utils)
12
MU
Packets
TU
of crisps in utils in utils
10
0
1
2
3
4
5
6
8
6
4
2
7
4
2
1
0
-1
0
7
11
13
14
14
13
MU = ΔTU/ ΔQ
0
0
1
2
3
4
-2
Packets of crisps consumed (per day)
5
MU
6
HOW DOES THE LAW OF DIMINISHING
MARGINAL UTILITY SUPPORT THE LAW OF
DEMAND?
 the less of something you have, the more
satisfaction you gain from each additional unit
 MU you gain from that product is higher  you
have  willingness to pay more for it
 P are lower at higher QD because your
additional satisfaction diminishes as you
demand more
2. INCOME EFFECT
WHAT IS THE INCOME EFFECT?
effect that  or  P has on buying power of
income
 P  = buying power  (income seems )
 P  = buying power  (income seems )

3. SUBSTITUTION EFFECT
WHAT IS THE SUBSTITUTION EFFECT?
the change in the mix of goods purchased as a
result of  or  relative prices
 substitute: good that can be substituted for
another

 butter
vs. margarine
 coffee vs. tea
 perfect substitute: red pencil vs. yellow pencil
HOW DOES THE SUBSTITUTION EFFECT
SUPPORT THE LAW OF DEMAND?

Example: If P of butter , you will buy
margarine instead. QD of butter .
MARKETS & THE LAW OF DEMAND
market demand schedule/curve: P and QD for
all consumers of a good combined (the market)
 same principles apply to market as individuals

MARKET DEMAND FOR POTATOES (MONTHLY)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
100
Price (pence per kg)
A
20
700
80
60
40
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
MARKET DEMAND FOR POTATOES (MONTHLY)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
Price (pence per kg)
100
80
A
20
700
B
40
500
60
B
40
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
MARKET DEMAND FOR POTATOES (MONTHLY)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
Price (pence per kg)
100
80
A
20
700
B
C
40
60
500
350
C
60
B
40
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
MARKET DEMAND FOR POTATOES (MONTHLY)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
Price (pence per kg)
100
D
80
C
60
A
20
700
B
C
D
40
60
80
500
350
200
B
40
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
MARKET DEMAND FOR POTATOES (MONTHLY)
100
Price (pence per kg)
Market demand
Point
Price
(pence per kg) (tonnes 000s)
E
D
80
C
60
A
20
700
B
C
D
E
40
60
80
100
500
350
200
100
B
40
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
DETERMINANTS OF DEMAND
(SECTION 6.3)
CHANGE IN QUANTITY DEMANDED VS. CHANGE
IN DEMAND

change in quantity
demanded (ΔQD)


due to changes in:
 price
results in:
 movement along the
demand curve

change in demand


due to changes in:
 nonprice determinants
results in:
 demand curve shift
CHANGE IN QUANTITY DEMANDED
CHANGE IN DEMAND
CHANGE IN DEMAND
INCREASE = shift to RIGHT
DECREASE = shift to LEFT
NONPRICE DETERMINANTS OF DEMAND
1.
2.
3.
4.
5.
Income
Tastes & preferences
Prices of related goods
Expectations of future prices
Population size
1. INCOME

normal goods: demand
 as personal income 

inferior goods: demand
 as personal income 
(“Spam effect”)
LET’S SAY YOU RECEIVE A BONUS AT WORK …
…what happens to your demand for filet mignon?
RECENTLY (2008) THE ECONOMY HAS TAKEN A HUGE
DOWNTURN AND PEOPLE ARE FEELING THE EFFECTS
ON THEIR POCKETBOOKS….
… what happens to their
demand for filet
mignon?
… for Spam?
2. TASTES & PREFERENCES
Hybrids, especially the Toyota Prius
The “Friends” Haircut
THE EXAMPLES IN THE PREVIOUS SLIDE
RESULTED IN WHAT KIND OF DEMAND CHANGE?
3. PRICES OF RELATED GOODS

substitutes




goods that can replace
one another
butter vs. margarine
price change for one
leads to a shift in the
same direction in the
demand for the other
perfect substitutes: red
pencils vs. yellow pencils

complements




goods that are used
together
peanut butter & jelly
price change for one leads
to a shift in the opposite
direction in the demand
for the other
perfect complements:
right shoes and left shoes
LET’S SAY THE PRICE OF BUTTER SKYROCKETS…
… what happens to demand for margarine?
A BLIGHT ATTACKS THE PEANUT CROP, AND AS A
RESULT THE PRICE OF PEANUT BUTTER GOES UP…
… what happens to demand for jelly?
4. EXPECTATIONS OF FUTURE PRICES



future ΔP and current ΔD move in the same
direction
Ex. speculative buying. Google stock?
H20 before a hurricane
IF YOU THINK THAT THE PRICE OF GOOD WILL  IN
THE FUTURE, WHAT HAPPENS TO DEMAND IN THE
PRESENT?
5. POPULATION SIZE
pop.   D 
 pop.   D 

Ex. baby boomers
hit retirement  
demand for health
care services
PRICE ELASTICITY OF DEMAND
(SECTION 6.4)
WHAT DOES THE PRICE ELASTICITY OF DEMAND
MEASURE?
responsive of consumers’ QD to price changes
 price elasticity of demand = %ΔQD / %ΔP

%ΔQD = |Q2 – Q1| / Q1
 %ΔP = |P2 – P1| / P1

>1
price elastic
(responsive)
<1
price inelastic
(not very responsive)
=1
unitary elastic
SAMPLE PROBLEM #1
Let’s say that flat screen TVs normally cost
$300, and demand is 2,000 per month.
 Manufacturers reduce prices to $250.
Consumption increases to 2,500 per month.
 price elasticity = |2,500 – 2,000| / 2,000
|250 – 300| / 300
= 25% / 16.7%
= 1.50 (price elastic)

SAMPLE PROBLEM #2
In April, gas cost $3 per gallon, and demand
was 10,000 gallons per day.
 In May, gas rose to $3.50 per gallon, and
demand slipped to 9,750 gallons per day.
 price elasticity = |9,750 – 10,000| / 10,000
|3.50 – 3| / 3
= 2.5% / 16.7%
= 0.15 (price inelastic)

FACTORS DETERMINING ELASTICITY
1.
ability to substitute

2.
proportion of budget spent on good

3.
more substitutes = more elastic
more expensive item = more elastic
length of time to permit changes

more time = more elastic
Gasoline is inelastic
Restaurant meals are elastic
ESTIMATED PRICE ELASTICITIES OF DEMAND
FOR VARIOUS GOODS AND SERVICES
Inelastic
Estimated Elasticity of Demand
Salt; matches; airline travel, short-run
0.1
Gasoline
0.2 (short-run), 0.7 (long-run)
Physician services
0.6
Approximately Unitary Elasticity
Movies
0.9
Private education
1.1
Tires, long-run
1.2
Elastic
Restaurant meals
2.3
Airline travel, long-run
2.4
Fresh tomatoes
4.6
Source: http://www.mackinac.org/article.aspx?ID=1247
PERFECTLY ELASTIC/INELASTIC CASES
TOTAL REVENUE
total amount of money a company receives
from sales of a product
 TR = P x Q

SAMPLE PROBLEM
Edie’s Little Bakeshop sells scones for $1.50
each and sells 600 per month. What is her
total revenue?
 TR = P x Q = ($1.50)(600) = $900

RELATIONSHIP B/T PRICE & TOTAL REVENUE
price change has effect on total revenue
 typical goal: price change should not decrease
total revenue

Elastic Demand
 P   TR
Inelastic Demand
 P   TR
 P   TR
 P   TR
BACK TO PRICE ELASTICITY SAMPLE PROBLEM
#1 (TVS)
Should manufacturers reduce the price to $250?
 TR1 = ($300)(2,000) = $600,000
 TR2 = ($250)(2,500) = $625,000
YES, because total revenue increases.