Demand

Demand

Demand Schedule P QD 4/lb. .5 million 3/lb. 1million 2/lb. 2 million Oranges

Law of Demand

Law of Demand As P , QD (As P , QD )

Law of Demand As P , QD (As P , QD ) There is an inverse relationship between P and QD

Law of Demand As P , QD (As P , QD ) There is an inverse relationship between P and QD NOT As P , D

Law of Demand As P , QD (As P , QD ) There is an inverse relationship between P and QD NOT As P , D NOT As QD , P

Law of Demand As P , QD (As P , QD ) There is an inverse relationship between P and QD NOT As P , D NOT As QD , P NOT As D , S

Demand Curve P 4 3 2 D .5m 1m Oranges 2m QD

Demand Curve P P2 QD P1 D Q2 QD Q1 Oranges

Shape and Slope of a Demand Curve Slope – Negative (slopes downward from l-r) – Why? Law of Demand (inverse relationship between P and Q) Why true? – Income Effect – Substitution Effect

Shape and Slope of a Demand Curve Shape – Curved (not a straight line) – Why? Law of Diminishing Marginal Utility (the ice cream effect)

A change in price can only cause a change in quantity demanded, not a change in demand. A change in quantity demanded is a movement along the demand curve. Each point on the curve represents the quantity demanded at a particular price.

Changes in Demand Demand is all the possible quantities consumers are willing and able to buy at various prices. Therefore, a change in demand is a shift in the whole curve. – An increase in demand is a shift to the right. – A decrease in demand is a shift to the left.

Increase in Demand P People are now willing and able to buy more at all prices. P2 D1 D P1 Q2 QD Q3 Q1 Oranges

Determinants of Demand (causes a change in demand) Consumer Tastes / Preferences (advertising industry) Income normal goods inferior goods Change in the price of a related good Substitutes

Substitutes P P D P2 QD P1 P1 D1 D Q2 D Q Q1 Q1 Oranges Apples Papples QDapples Doranges QDoranges Q2 Q

Determinants of Demand (causes a change in demand) Consumer Tastes / Preferences (advertising industry) Income normal goods inferior goods Change in the price of a related good Substitutes Complements

Complements P P D P2 QD P1 P1 D D Q2 D1 Q Q1 Q2 Jelly Peanut Butter PPB QDPB DJelly QDJelly Q1 Q

Determinants of Demand (causes a change in demand) Consumer Tastes / Preferences (advertising industry) Income normal goods inferior goods Change in the price of a related good Substitutes Complements Future Price Expectations Number of Consumers

Price Elasticity of Demand P P D D Q Gas Q Movies

Price Elasticity of Demand Measures how responsive quantity demanded is to a change in price – Gas is inelastic (not very responsive) – Movies are elastic (very responsive) Determinants of Elasticity – Necessity or Luxury? – Number of Substitutes? – Portion of Budget?

Total Revenue Test Total Revenue (TR) P x Q If P, and TR, then D is inelastic If P, and TR, then D is elastic If P, and n/c TR, then D is unit elastic

Total Revenue Test Movie Prices Ticket Price Tickets Sold 6.00 x 100 600 8.00 x 80 640 (inelastic) 8.00 x 50 400 (elastic) 8.00 x 75 600 (unit elastic)