Chapter 3: Demand

Wants vs. Demand

Wants are unlimited

Demand is affected by cost

DemandEconomically Speaking: Qty of a good or service one is willing and able to buy at various prices

If you are unwilling and/or unable to buy, you can’t demand

Law of Demand: People will buy more at a lower cost, and less at a higher cost

Price Effect: How Law of Demand affects us - we’ll buy more at a lower price than a higher price.

(Prices = incentives, disincentives)

How to Graph Demand:

Market Demand: All possible P,Q combinations!

Price(P)

Quantity (Q)

Demand (D)

What are considerations of demand?

Buying Power: “Bang for the Buck”

Diminishing Personal Value: “What’s more important to you?”

Diminishing Marginal Utility: “You CAN have too much of a good thing!”

Marginal: econ-speak for “extra”

Utility: econ-speak for “happiness, satisfaction”

Substitutes: “What else can you buy instead?”

Elasticity of Demand

Elasticity: How much does a change in price affect the quantity demanded?

Elastic: A Price ∆ can cause an appreciable ∆ in Qty demanded.

Price Effect is Strong - “Luxury”

Inelastic: A price ∆ does not really cause a ∆ in Qty demanded

Price Effect is Weak - “Necessity”

Quick Math Test: An in Price = in QtyIf the Revenue (P * Q) increases, then inelasticIf the Revenue (P * Q) decreases, then elastic

What Affects Elasticity?

Availability of Substitutes substitutes = elasticity

% of Budget % of budget = elasticity

Time time to adjust = elasticity

time to adjust = elasticity

Price Effect vs. Change in Demand

Market Demand is the combination of all P and Q demanded

Various points along demand curve = Price Effect

A Change in Demand occurs when:People demand Q at all P

People demand Q at all P

A Demand Curve Shift

P

Q

D1

D2

D3

D1 = Original Demand

D2 = Increase in Demand

D3 = Decrease in Demand

What Causes A Demand Shift?

Change in IncomePrices or Availability of SubstitutesPrices or Availability of ComplementsChange in Weather or SeasonChange in # of BuyersChange in Styles, Tastes, HabitsChange in Expectations