Demand

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Demand analysis - intuition

Marginal Cost/Marginal Benefit analysis of consumers

If Marginal Benefit > Marginal Cost, buy it

If Marginal Benefit < Marginal Cost, don’t buy it

Marginal Benefit is reflected by what consumer is willing to pay. Marginal Cost is price of item.

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Demand for Adam Humphrey’s Visa Service (based on individual’s willingness to pay)

Depends on, Price of Service Individual’s Income Price Associated with Doing it at Burger King How much does the person really want to go

to China or how big a hassle is it to come back.

Number of Individuals going to Chinese Consulate for visa.

Demand for Adam Humphrey’s Visa Service

Market Demand for Adam Humphrey’s Visa Service

Obtained by summing all individual demands.

Depends on, All factors that affect individuals’ demands

(price of service, income, price of related goods, tastes/preferences, expectation of future prices, etc.)

Number of Individuals (population)

Individuals Can Demand Multiple Units

Example of Change in Demand due to Increase in Income

Normal Good At every price people buy more so demand increases -shifts to right.

Examples:1. Adam Humphrey’s Service2. i phones3. Lego Robotics4. Shrimp5. Yachts6. Red Haven Restaurant

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D1

Example of Change in Demand due to Increase in Income

Inferior Good At every price people buy less so demand decreases -shifts to left.

Examples:1. Generic Diapers2. Bologna3. Canned Beans4. Ford Fiesta5. Bus tickets

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D1

Change in demand due to change in the price of a related good Substitutes

Two goods that satisfy similar needs or desires

Examples:

Adam Humphrey’s Service and Burger King’s Internet Café

Chicken Breasts and Chicken Wings

Diet Coke and Diet Pepsi 9

Change in demand due to change in the price of a Substitute

Price of a substitute good INCREASES -

Demand Increases

Shifts Right

Example:

Price of Diet Pepsi increases, Demand for Diet Coke increases

D1

Q

P

D0

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Change in demand due to change in the price of a Substitute

Price of a substitute good DECREASES -

Demand Decreases

Shifts Left

Example:

Price of Diet Pepsi decreases, Demand for Diet Coke decreases

D1

Q

P

D0

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Change in demand due to change in the price of a Substitute

Price of a substitute good INCREASES -

Demand Increases

Shifts Right

Example:

Price of Diet Pepsi increases, Demand for Diet Coke increases

D1

Q

P

D0

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Change in demand due to change in the price of a related good:

Complements Two goods that are used jointly in consumption.

Examples: Adam Humphrey’s Service and Airfare to ChinaHardware and SoftwareGasoline and GMC Yukons

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Change in demand due to change in the price of a Complement

Price of a complementary good INCREASES -

Demand Decreases

Shifts Left

Example:

Price of Hardware increases, Demand for Software decreases

D1

Q

P

D0

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Change in demand due to change in the price of a Complement

Price of a complementary good DECREASES -

Demand Increases

Shifts Left

Example:

Price of Hardware decreases, Demand for Software increases

D1

Q

P

D0

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Demand = Willingness to Pay

P=35

Consumer Surplus (The value consumers get from a good but do not have to pay for.)

What does the demand curve look like?Which demand below is for the more “price sensitive” product?

How “price sensitive” are consumers to:

Salt

Cigarettes

Gasoline

Diet Coke

i Phones

Chipotle on Grand River

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P P

Q

D1

Q

D2

What determines price sensitivity/ price elasticity?

Number of substitutes The more substitutes or the closer the substitutes, the… more elastic Time interval The longer time interval the… more elastic Share of budget The larger share of the budget the … more elastic

Ex. Diet Coke

Ex. Gasoline

Ex. Salt

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