The Economics of Demand

1
The Economics of Demand

• The Demand Curve
• Elasticity of Demand
• Changes in Demand

2
Demand
Consider

• Why are newspapers sold in vending machines that
  allow you to take more than one copy?
• How much do you eat when you can eat all you
  want?
• What cures spring fever?
• What economic principle is behind the saying,
  Been there, done that?
• Why do higher cigarette taxes cut smoking by
  teens more than by other age groups?

3
The Demand Curve
Objectives

• Explain the law of demand
• Interpret a demand schedule and demand curve

4
The Demand Curve
Key Terms

• demand
• law of demand
• marginal utility
• law of diminishing marginal utility
• demand curve
• quantity demanded
• individual demand
• market demand

5
Demand

• Demand indicates how much of a product consumers
  are both willing and able to buy at each possible
  price during a given period, other things
  remaining constant.

6
Law of Demand

• The law of demand says that quantity demanded
  varies inversely with price, other things
  constant. Thus, the higher the price, the smaller
  the quantity demanded.

7
Law of Demand

• Demand, wants, and needs 
• Substitution effect
• The change in the relative price (the price of
  one good relative to the prices of other goods)
  causes the substitution effect
• If all prices changed by same margin, there would
  be no substitution effect
• Income effect
• Money income the number of dollars you receive
  per period
• Real income measure in terms of how many goods
  and services you can buy
• Diminishing marginal utility
• Marginal utility additional satisfaction you
  derive from each item
• Law of marginal utility you derive from each
  additional item consumed decreases as your
  consumption increases (example pizza slices)

8
Demand Schedule and Demand Curve

• Demand versus quantity demanded
• Individual demand
• Market demand

9
Demand Schedule
10
Demand Curve for Pizza
11
Individual Demand for Pizzas
12
Market Demand for Pizzas
13
Elasticity of Demand
Objectives

• Compute the elasticity of demand and explain its
  relevance.
• Discuss factors that influence elasticity of
  demand.

14
Computing the Elasticity of Demand

• Elasticity of demand measures the percentage
  change in quantity demanded divided by percentage
  change in price.

15
Computing Elasticity of Demand

• Elasticity values
• gt1 it is elastic
• Percentage change in price will result in larger
  percentage change in the quantity demanded
• 1 it is unit-elastic
• lt1 it is inelastic
• Demand is usually more elastic at higher prices
  and less elastic with lower prices
• Elasticity and total revenue
• Price xs quantity demanded at that price

16
The Demand for Pizza
17
Determinants of Demand Elasticity

• Availability of substitutes
• The greater the availability of substitutes for a
  good, the greater the goods elasticity of demand
• Share of consumers budget spent on the good
• Increase in prices reduced the demand because
  people are not both willing and able to purchase
  _at_ higher prices
• A matter of time
• The longer the adjustment period, the greater the
  consumers ability to substitute
• Some elasticity estimates
• The elasticity of demand is greater in the long
  run because consumers have more time to adjust

18
Demand Becomes More Elastic Over Time
19
Selected Elasticities of Demand
20
Other Determinants of Demand

• Consumer Income
• The prices of related goods
• The number and composition of consumers
• Consumer expectations
• Consumer tastes

21
Changes in Consumer Income

• If income ?, consumers willing and able to buy
  more which ? demand
• Demand curve shifts to the right
• Two categories of goods
• Normal goods demand increases as money income
  increases
• Inferior goods demand decreases as money income
  increases
• Examples used clothing, bus rides, etc.

22
Changes in the Prices of Related Goods

• Substitutes
• Decrease in price of one item will reduce the
  demand for a substitute
• Example Tacos and Pizza
• Complements
• Certain goods used together
• Example airline tickets and car rentals
• A decrease in the price of one shifts the demand
  of the other rightward

23
Changes in Prices of Related Goods (cont)

• Changes in size or composition of the population
  will increase demand and shift the curve to the
  right
• Changes in consumer expectations can shift the
  demand curve to the left or the right
• Changes in consumer tastes
• Tastes are your likes and dislikes as a consumer

24
Movement along the Curve

• Movement vs. Shift
• A change in price, causes a movement along the
  demand curve, changes the quantity demanded
• A change in one of the determinants of demand
  other than price causes a shift of a demand curve

25
Extensions of Demand Analysis

• Role of time
• Your willingness to pay more for time-saving
  goods depends on the opportunity cost of your
  time!