Demand
Slide Show 7
Section I
What is Demand?
 Demand
is a behavior of buyers, that determines
the price at which a good is sold along with
Supply.
 The two terms refer to the behavior of people as
they interact with one another in markets.


Remember that markets consist of a group of buyers and
sellers of a particular good.
The key point to remember is that Demand influences the
price of an object, but is not the only factor.
 The
term quantity demanded refers to the amount
of the good that buyers are willing AND able to
purchase.

Just cause we are willing does not mean we are able.
What influences quantity
demand?

We start with the Law of Demand, which states that,
other things remaining equal, the quantity
demanded(QD) of a good falls when the price (P) of
the good rises. Demand does NOT change, just the
QD.
So the first thing that influences quantity
QD
P
demanded is price. Price and QD have an
inverse relationship, meaning if P falls QD
would rise and vice versa.
This is why stores put stuff on sell, to get it out of
the store.
Price causes a movement along the demand
curve, whereas the next four factors cause
shifts in the demand curve to the left or to the
right.
 The
first influence on quantity demanded is
Income. Changes to a buyers income effect the
quantity demanded on different goods.
 IF the quantity demanded for a good falls when
income (I) falls, the good is called a Normal good
(NG).
I
NG
 However,
So if you take a pay cut and that causes you to buy
less steak then the steak is labeled as a normal
good.
not all goods are normal (but the
majority are). IF the quantity demanded rises for a
good because income falls then the good is an
Inferior good (IG).
I
IG So using our previous example, if you take a
pay cut that causes you to buy less steak you
might buy more chicken instead. That would
make the chicken an inferior good.

The next influence on quantity demanded is the Price
of related goods. When the fall of one good reduces
the quantity demanded on another good, the goods
are called Substitute goods.
We will look at chicken and steak again. If the price of
steak were to go down AND that caused the quantity
demanded for chicken to decrease, the two are
substitutes.
Price

QD
Demand Price
Since steak is now cheaper than
chicken (no price change)
people buy less chicken and
more steak.
Remember that this works both ways, if the price of steak were to go
up the QD would go down and the quantity demanded for chicken
would rise.
 On
the other hand, if the price of one good raises
the quantity demanded for another good, the
two are called Complementary goods.
We will use hamburgers as an example. IF the price of
hamburgers dropped, what effect would that have on the
quantity demanded for hamburger buns?
Price
QD
Demand Price
Since the price of burgers went down people bought more, this
meant that the quantity demanded for buns went up even though
the price of the buns did not change.
A
third factor that influences quantity demanded
is Taste.
 Sometimes a change in price does not matter to
people.
 If you only drink Coke and hate the taste of Pepsi
then a small rise in the cost of Coke will deter you
from drinking it.

However, it may lead you to drink less Coke and
choose a substitute. But you are not going to start
drinking Pepsi.
 The
fourth factor that influences quantity
demanded is Expectations.


Your expectations about the future may determine
your willingness to purchase a good or service at a
certain price.
For example, if you believe that the price of Coke
is going to double in the next year you may buy a
large amount of Coke now.
Is demand endless?
 The
answer is no, demand is not endless. If you
really want a Coke and buy one and drink it do
you want 10 more immediately?
 We use the term Utility to refer to satisfaction. We
used the term earlier as a reference to value.


How useful is something helps determine its value.
From an economic standpoint we use the following
terms.
 Total
Utility is the total benefit that a person gets from a
good or service.
 Marginal Utility is the change in total utility that results
from a one unit increase in the QD consumed.
Utility Charted
Lets say for example that you drink Coke, below is Utility Schedule for
your Coke drinking.
Quantity
you
drink per
day
0
1
2
Total Utility
Marginal
Utility
0
15
27
3
36
4
42
5
47
6
51
15
12
9
6
5
4
Do not worry about where the
numbers for total utility came from.
What we see – as you drink more coke your
total utility increases. So our total benefit is
always rising as we consume more.
But look at marginal utility, the more we
drink the less satisfied we are at each new
drink.
For example: at drink 4 our total utility was
42 then we drink number 5 and our total
utility is 47. So a difference of 5, but when
we drink number 6 our marginal utility
becomes 4.
Why is this important?
 The
reason we study this is because it shows a
valuable point in economics that if you put too
much of something in the market the benefit we
receive from it diminishes every time we consume
more.

Think about like this: if a movie theater were to show
the same movie every day for months, what would
happen to ticket sales?
 They
would steadily go down as there were less and less
people who had not seen the movie. So they would lose
money by continuing to try and show it.