Economics Ch.4 Demand

Definition Demand means:

• How much of something a consumer is “willing and able” to buy, other things constant.

• This explains why the law of demand states, quantity demanded varies inversely with the price. (Consumers are only “willing” to pay certain prices)

• More supply = lower price (Chevrolet)

• Less supply= higher price (Ferrari)

Consumer Demands vs. Wants vs. Needs

Relationship between the 3.

• 1. Demand is what people actually seek to buy of a product.

• 2. Wants are unlimited, but cannot be met because of scarcity.

• 3. Needs are what the consumer is “willing and able” to buy at a given price. ▫ Ex. Your coat may be out of

style, but a new one may cost too much so you keep the old one. Want vs. Need.

Substitution Effect Explains the law of demand

• Many goods can satisfy most consumer wants.

• Ex. Hunger can be fixed by eating pizza, burgers, fish, or chicken. You must pick. Sometimes price/sometimes taste/sometimes pressure.

• Scarcity ultimately determines how you satisfy your hunger.

• This effect only works if a specific product’s price falls compared to others. (Coke v. Pepsi on sale)

• If every other type of food drops it’s prices then you wouldn’t have to substitute.

Income Effect Income determines demand

• Your job pays a specific amount per hr. or per month.

• This is called your “Money Income”. It also determines what you can purchase, and what your demands may be.

• If the price of some good you normally buy goes down, you experience an increase of your “Real Income”.

• This is because you now have more money left over after buying that good or you can buy more of it. (Dime bag goes from $10 to $5. You can buy 2 now)

Diminishing Marginal Utility Effect Marginal Utility

• Marginal means one more unit of a good that you can afford.

• Utility is the “satisfaction” you experience from an additional unit of a product, so marginal utility is how you feel about having another “one” of it until you can’t have more. ▫ Ex. (Pizza at the game) 2

bucks a slice until the 4th quarter, then $1. You won’t want any more anyway no matter what the cost because your full.

▫ Your desire for more pizza is diminishing with each slice, but you may buy one for lunch tom. because the price is right.

Quantity demanded vs. Demand

Demand Curve

• A demand curve shows the price and quantity demanded. (see the chart)

• The quantity demanded is only one specific point on the curve.

• The demand is the overall or entire curve. It represents all points shown.