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