Demand

Demand Curve

• economic model of price determination in a market.
• Consumer demand and consumer wants are not the same thing

demand - different quantities that people are willing and able to buy at different prices in a given period of time. 

• prices provide information
• help answer the 5 questions

Consider the table below.

Hat-Tip: Darsey and Dr. Doyle

Demand Curves

• Price Axis (Y axis) 
• Quantity Axis (X axis) 

Law of Demand: inverse relationship b/t price and quantity demanded. (Demand curves slope down)

Three reasons why: 

• Substitution effect 
• Income Effect
• Decreasing Marginal Utility 

1. substitution effect

• substitute goods: goods which, as a result of changed conditions, may replace each other in use or consumption.

2. income effect

• changes in price affects purchasing power (real income)
• increase in price can decrease real income.
• decrease in price can increase real income. 

3. law of diminishing marginal utility 

Marginal Utility: The satisfaction you derive from an additional unit of a product. 

• (diminishing additional satisfaction)
• the first unit of consumption of a good or service yields more utility than the second and subsequent units. 
• (MU declines as consumption increases)

Change in Demand vs. Change in Quantity Demanded

PRICE CHANGE DOES NOT CHANGE DEMAND 

• DEMAND = "the relationship"
• PRICE changes QUANTITY DEMANDED
  

Movement along the curve: a change in Q demanded

• only thing that can affect it is price
• price never shifts the curve, it moves along the curve,

When the "RELATIONSHIP" changes, the curve moves. 

Movement of the curve: change of demand. 

• one of the five shifters of demand (change in any non-price determinant of demand)

1. Changes in consumer income
2. Changes in tastes and preferences
3. Changes in expectations
4. Changes in the prices of related goods
   (substitutes and complements)
5. Changes in Population size and composition

1. Changes in income

 Normal vs. Inferior Goods

Normal good

• income increase = demand increase   
• income decrease = demand decrease

Inferior Good

• income increase = demand decrease
• income decrease = demand increase

2. Changes in tastes and preferences 

• just what it sounds like
• perceptions of quality / value 

3. Changes in expectations

• expected future prices 
• future price increase = demand increase
• future price decrease = demand decrease
  

4. Changes in Related Goods
Substitutes: Products than can be used in place of each other.

• goods are substitutes if an increase in price for one shifts demand in the other.  

Compliments: Goods used in combination with other goods. 

• If two goods are compliments, a decrease in the price of one increases demand for the other. 

5. Changes in Population size and composition

• more people = more demand
• less people = less demand
• different people  = different demands

About the Graph:

• Increase in demand: curve shifts to the right 
• Decrease in demand: curve shifts to the left