branch of economics that examines individuals’ choices concerning 1 product/firm/industry

quantities (Q) of a good that consumers are willing and able to purchase at various prices (P) during a given period of time

table listing the quantities demanded (QD) at various prices (P)

graph of the relationship b/t the price (P) of a good and the quantity demanded (QD)

D = demand neg. slope

P = prices Y-axis

Q = quantities X-axis

the QD of a good will be greater at lower P than will the QD at higher P (ceteris paribus)

inverse relationship b/t P and Q

1. diminishing marginal utility2. income effect3. substitution effect

utility: amt. of satisfaction one receives from consuming a good

total utility (TU): total amt. of satisfaction from consuming an amt. of goods

marginal utility (MU): amt. of satisfaction from consuming 1 more unit of a good

as additional units of a product are consumed, the additional satisfaction starts to

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MU = ΔTU/ ΔQ

the less of something you have, the more satisfaction you gain from each additional unit

MU you gain from that product is higher you have willingness to pay more for it

P are lower at higher QD because your additional satisfaction diminishes as you demand more

effect that or P has on buying power of income

P = buying power (income seems )

P = buying power (income seems )

the change in the mix of goods purchased as a result of or relative prices

substitute: good that can be substituted for another butter vs. margarine coffee vs. tea perfect substitute: red pencil vs. yellow

pencil

Example: If P of butter , you will buy margarine instead. QD of butter .

market demand schedule/curve: P and QD for all consumers of a good combined (the market)

same principles apply to market as individuals

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change in quantity demanded (ΔQD) due to changes in:

price results in:

movement along the demand curve

change in demand due to changes in:

nonprice determinants results in:

demand curve shift

INCREASE = shift to RIGHT DECREASE = shift to LEFT

1. Income2. Tastes & preferences3. Prices of related goods4. Expectations of future prices5. Population size

inferior goods: demand as personal income (“Spam effect”)

normal goods: demand as personal income

…what happens to your demand for filet mignon?

… what happens to their demand for filet mignon?

… for Spam?

The “Friends” Haircut

Hybrids, especially the Toyota Prius

substitutes goods that can

replace one another butter vs. margarine price change for one

leads to a shift in the same direction in the demand for the other

perfect substitutes: red pencils vs. yellow pencils

complements goods that are used

together peanut butter & jelly price change for one

leads to a shift in the opposite direction in the demand for the other

perfect complements: right shoes and left shoes

… what happens to demand for margarine?

… what happens to demand for jelly?

future ΔP and current ΔD move in the same direction

Ex. speculative buying. Google stock? H20 before a hurricane

pop. D pop. D

Ex. baby boomers hit retirement demand for health care services

responsive of consumers’ QD to price changes

price elasticity of demand = %ΔQD / %ΔP

%ΔQD = |Q2 – Q1| / Q1

%ΔP = |P2 – P1| / P1

> 1 price elastic(responsive)

< 1 price inelastic(not very responsive)

= 1 unitary elastic

Let’s say that flat screen TVs normally cost $300, and demand is 2,000 per month.

Manufacturers reduce prices to $250. Consumption increases to 2,500 per month.

price elasticity = |2,500 – 2,000| / 2,000 |250 – 300| / 300 = 25% / 16.7% = 1.50 (price elastic)

In April, gas cost $3 per gallon, and demand was 10,000 gallons per day.

In May, gas rose to $3.50 per gallon, and demand slipped to 9,750 gallons per day.

price elasticity = |9,750 – 10,000| / 10,000 |3.50 – 3| / 3 = 2.5% / 16.7% = 0.15 (price inelastic)

1. ability to substitute more substitutes = more elastic

2. proportion of budget spent on good more expensive item = more elastic

3. length of time to permit changes more time = more elastic

Gasoline is inelastic Restaurant meals are elastic

Inelastic Estimated Elasticity of Demand

Salt; matches; airline travel, short-run

0.1

Gasoline 0.2 (short-run), 0.7 (long-run)

Physician services 0.6

Approximately Unitary Elasticity

Movies 0.9

Private education 1.1

Tires, long-run 1.2

Elastic

Restaurant meals 2.3

Airline travel, long-run 2.4

Fresh tomatoes 4.6Source: http://www.mackinac.org/article.aspx?ID=1247

total amount of money a company receives from sales of a product

TR = P x Q

Edie’s Little Bakeshop sells scones for $1.50 each and sells 600 per month. What is her total revenue?

TR = P x Q = ($1.50)(600) = $900

price change has effect on total revenue

typical goal: price change should not decrease total revenue

Elastic Demand

Inelastic Demand

P TR P TR

P TR P TR

Should manufacturers reduce the price to $250?

TR1 = ($300)(2,000) = $600,000

TR2 = ($250)(2,500) = $625,000

YES, because total revenue increases.