Chapter Objectives Section 1: What Is Demand?

1. Chapter Objectives Section 1: What Is Demand? • Describe and illustrate the concept of demand. • Explain how demand and utility are related. 1

2. Introduction • Only those people with demand–the desire, ability, and willingness to buy a product–can compete with others who have similar demands. • Demand is a microeconomic concept. • Microeconomics is the area of economics that deals with behavior and decision making by small units, such as individuals and firms. Click the mouse button or press the Space Bar to display the information. 2

3. Introduction (cont.) • Collectively, these concepts of microeconomics help explain how prices are determined and how individual economic decisions are made. 3

4. An Introduction to Demand • In a market economy people and firms act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions. • Knowledge of demand is important for sound business planning. Click the mouse button or press the Space Bar to display the information. 4

5. Demand Illustrated • To illustrate how demand affects business planning, imagine you are opening a store. • Before you begin, you need to know where the demand is. Click the mouse button or press the Space Bar to display the information. 5

6. Demand Illustrated (cont.) • How do you measure the demand for your services? – You may visit other shops and gauge the reactions of consumers to different prices. – You may poll consumers about prices and determine demand from this data. – You could study data compiled over past years, which would show consumer reactions to higher and lower prices. • All of these methods would give you a general idea as to the desire, willingness, and ability of people to pay. Click the mouse button or press the Space Bar to display the information. 6

7. The Individual Demand Schedule • A demand schedule is a listing that shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time. Figure 4.1 The Demand for Compact Discs 7

8. The Individual Demand Curve • The information found in a demand schedule can also be shown graphically as a downward-sloping line on a graph. • Transfer the price-quantity observations in the demand schedule to the graph, and then connect the points to form the curve. Click the mouse button or press the Space Bar to display the information. 8

9. The Individual Demand Curve (cont.) • Economists call this the demand curve, a graph showing the quantity demanded at each and every price that might prevail in the market. Figure 4.1 The Demand for Compact Discs 9

10. The Law of Demand • The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. – When the price goes up, quantity demanded goes down. – When the price goes down, quantity demanded goes up. Click the mouse button or press the Space Bar to display the information. 10

11. Foundations for the Law of Demand • Price is an obstacle which discourages consumers from buying. • The higher this obstacle, the less of a product they will buy; the lower the obstacle, the more they will buy. • Common sense and simple observation are consistent with the Law of Demand. Click the mouse button or press the Space Bar to display the information. 11

12. The Market Demand Curve • A market demand curve shows the quantities demanded by everyone who is interested in purchasing the product. • To get the market demand curve we add together the number of items that everyone would purchase at every possible price, and then plot them on a separate graph. • The only real difference between the individual demand curve and the market demand curve is that the market demand curve shows the demand for everyone that is interested in buying the product. Click the mouse button or press the Space Bar to display the information. 12

13. Figure 4.2 Individual and Market Demand Curves