Post on 29-Dec-2015
Economics Ch.4 Demand
Definition Demand means:
• How much of something a consumer is “willing and able” to buy, other things constant.
• This explains why the law of demand states, quantity demanded varies inversely with the price. (Consumers are only “willing” to pay certain prices)
• More supply = lower price (Chevrolet)
• Less supply= higher price (Ferrari)
Consumer Demands vs. Wants vs. Needs
Relationship between the 3.
• 1. Demand is what people actually seek to buy of a product.
• 2. Wants are unlimited, but cannot be met because of scarcity.
• 3. Needs are what the consumer is “willing and able” to buy at a given price. ▫ Ex. Your coat may be out of
style, but a new one may cost too much so you keep the old one. Want vs. Need.
Substitution Effect Explains the law of demand
• Many goods can satisfy most consumer wants.
• Ex. Hunger can be fixed by eating pizza, burgers, fish, or chicken. You must pick. Sometimes price/sometimes taste/sometimes pressure.
• Scarcity ultimately determines how you satisfy your hunger.
• This effect only works if a specific product’s price falls compared to others. (Coke v. Pepsi on sale)
• If every other type of food drops it’s prices then you wouldn’t have to substitute.
Income Effect Income determines demand
• Your job pays a specific amount per hr. or per month.
• This is called your “Money Income”. It also determines what you can purchase, and what your demands may be.
• If the price of some good you normally buy goes down, you experience an increase of your “Real Income”.
• This is because you now have more money left over after buying that good or you can buy more of it. (Dime bag goes from $10 to $5. You can buy 2 now)
Diminishing Marginal Utility Effect Marginal Utility
• Marginal means one more unit of a good that you can afford.
• Utility is the “satisfaction” you experience from an additional unit of a product, so marginal utility is how you feel about having another “one” of it until you can’t have more. ▫ Ex. (Pizza at the game) 2
bucks a slice until the 4th quarter, then $1. You won’t want any more anyway no matter what the cost because your full.
▫ Your desire for more pizza is diminishing with each slice, but you may buy one for lunch tom. because the price is right.
Quantity demanded vs. Demand
Demand Curve
• A demand curve shows the price and quantity demanded. (see the chart)
• The quantity demanded is only one specific point on the curve.
• The demand is the overall or entire curve. It represents all points shown.