DEMAND• Definition: The various quantities of a good or service that

someone is WILLING and ABLE to buy at DIFFERENT PRICES at a PARTICULAR TIME

• WILLING and ABLE

•Does Mr. Bull have demand for…?:

YES!

NO!!!

NO!

Individual Demand vs. Market Demand• I may not have demand for a porsche, but

others do…•Market Demand – Sum of all individual’s

demand

Demand Schedule

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Graphing Demand

Demand Schedule Demand Curve

Law of Demand

•As Price increases, Quantity Demanded decreases•As Price decreases, Quantity

Demanded increases

As P↑, Qd↓As P↓, Qd↑

Nature of Demand Curve

• Diminishing marginal utility•What would compel you to buy

additional JBCs?

Change in Quantity Demanded• Income Effect• Buying power

• Substitution Effect• Pepsi vs. Coke

Change in Quantity Demanded

Change in Demand1. Change in Income

mo’ money = mo’ problems purchases 2. Change in Prices and Availability of Substitutes

ex: Pens and Pencils3. Change in Prices and Availability of Complements

ex: Paper and Pencils4. Change in Weather or Seasons

ex: Shorts in winter, Sleds in summer, Gas?5. Change in Number of Buyers

ex: larger/smaller market, population change, technology6. Change in Styles, Tastes, Habits, Preferences

fashion, coolness, trends – ex:7. Change in Expectations

future oriented – ex: harvest, technology

Individual Demand

6

5

4

3

2

1

0

Quantity Demanded (bushels per week)

Pri

ce (

per

bu

shel

)

P Qd

$5

4

3

2

1

10

20

35

55

80

IndividualDemand

P

Q

D1

2 4 6 8 10 12 14 16 18

Demand Can Increase or Decrease

Increase in Demand

Decrease in Demand

D2

D3

3-14

Individual Demand

6

5

4

3

2

1

0

Quantity Demanded (bushels per week)

Pri

ce (

per

bu

shel

)

P Qd

$5

4

3

2

1

10

20

35

55

80

IndividualDemand

P

Q

D1

2 4 6 8 10 12 14 16 18

Demand Can Increase or Decrease

Decrease in Demand

D2

D3

Change in Demand

Change in Quantity Demanded

3-15

Elasticity•Measurement of a good’s

responsiveness to a change in price• The price effect is greater for some

goods than for others• Examples:

Elasticity• Large Price Effect → Elastic

Ex:

• Small Price Effect → InelasticEx:

Other Examples?

Factors Affecting Elasticity• Time:• Can purchase be delayed?• Time to adjust…• Longer price change persists = more elastic• Immediately after price change = more inelastic

•Availability, Suitability, Price of Substitutes• More/better/cheaper substitutes = more elastic• Ex: Ibuprofen vs. Insulin

•Percentage of Budget• Larger % = more elastic• Ex: New Car for me vs. LeBron James

Testing for Elasticity• Graphical Comparison

The flatter the curve, the more Elastic the good.The steeper the curve, the more Inelastic the good.

Inelastic

Elastic

Testing for Elasticity• Total Revenue Test --- TR = P x Q• Example:• If P and TR move in the same

direction, demand isinelastic

• If P and TR move in oppositedirections, demand iselastic

• Hot Dogs?• Gas?

Extending Elasticity

• How does elasticity of demand affect us?• What do these have in common?

• Government taxes inelastic goods…• Why doesn’t govt. tend to tax elastic goods?