What

is

Demand?

Demand: The desire, ability, and

willingness to buy a product.

Impact of Demand: Demand determines what the producers will produce and in

what quantities.

Remember Consumer Sovereignty??

Demand Schedule: Shows the various

quantities demanded of a

particular product at all prices that might prevail in the market

at a given time.

Demand Curve:

Shows the quantity demanded at each

and every price that might prevail

in the market.

Law of Demand:

The quantity demanded varies inversely with its price.

When the price of something goes up, the quantity demanded

decreases. Likewise, when the price goes down, the quantity demanded

increases.

Utility:

The amount of usefulness or satisfaction that someone gets from the use of a product.

Marginal Utility: The extra usefulness or

additional satisfaction a person gets from acquiring or using one

more unit of a product.

Also known as the “Law of Diminishing Returns”.

Factors Affecting Demand

Determinants of Demand

Determinants: 1. Consumer Income

2. Consumer Tastes

3. Substitutes Goods

4. Complementary Goods

5. Consumers’ Price Expectations

6. Number of Consumers

Consumer Income:

When there is an increase in

consumer income, demand for

most goods increases.

If there is a decrease in consumer income, demand for most goods decreases.

The exception to this rule are called inferior goods, because people buy less of them as their income rises.

Consumer Tastes: If consumers like a product more, based on advertising or experience in using the good, demand increases.

If consumers like a good less over time, demand decreases.

1960s 1970s

Substitute Goods:

If the price of a good increases, this will increase demand for a substitute good.

If the price of Coca Cola increases, for example, the demand for Pepsi Cola will increase.

Substitute Goods:

If the price of a substitute good increases, this will result in an increase in demand for the original product.

If the price of Pepsi Cola increases, the demand for Pepsi Cola will decrease, and the demand for Coca Cola will increase.

Complimentary Goods:

If the price of a complementary good increases, this will decrease demand for the original good. If the price of bacon increases sharply, for example, the demand for bacon cheeseburgers will decrease.

Complimentary Goods:

If the price of a complementary good decreases, this will result in an increase in demand for the original good. If the price of bacon decreases, the demand for bacon cheeseburgers will increase.

Consumers’ Price Expectations:

Consumers’ expectations about the future price of a good influences demand.

If consumers expect the price to increase in the near future, they try to buy more of a good now before the price increases.

If consumers expect the price to decrease in the near future, they will hold off their purchase until the price decreases.

Number of Consumers: If there is an increase in the number of consumers, this will result in an increase in demand for most goods.

If there is a decrease in the number of consumer, this will result in a decrease in the demand for most goods.

Immigration is an example of the number of consumers changing.

ELASTICITY OF DEMAND

What is Demand Elasticity?

It is a measure that shows how a change in quantity demanded responds to a change in price.

Elastic Demand

Type of elasticity where a change in price causes a relatively large change in quantity demanded

(see figure 4.5 – p. 104, item A)

Inelastic Demand

Type of elasticity where a change in price causes a relatively smaller change in the quantity demanded

(see figure 4.5 – p. 104, item B)

Unit Elastic Demand

Type of elasticity where a change in price causes a proportional change in quantity demanded

(see figure 4.5 – p. 105, item C)

Determinants of Demand Elasticity

1. Can The Purchase Be Delayed?

2. Are Adequate Substitutes Available?

3. Does The Purchase Use a Large Portion of Income?