Understanding Demand: The Relationship Between Price and Quantity

1. Demand

2. Demand • A household’s quantity demanded of a good • Specific amount household would choose to buy over some time period, given • A particular price that must be paid for the good • All other constraints on the household • Market quantity demanded (or quantity demanded) is the specific amount of a good that all buyers in the market would choose to buy over some time period, given • A particular price they must pay for the good • All other constraints on households

3. Quantity Demanded • Implies a choice • How much households would like to buy when they take into account the opportunity cost of their decisions? • Is hypothetical • Makes no assumptions about availability of the good • How much would households want to buy, at a specific price, given real-world limits on their spending power? • Stresses price • Price of the good is one variable among many that influences quantity demanded • We’ll assume that all other influences on demand are held constant, so we can explore the relationship between price and quantity demanded

4. The Law of Demand • States that when the price of a good rises and everything else remains the same, the quantity of the good demanded will fall • The words, “everything else remains the same” are important • In the real world many variables change simultaneously • However, in order to understand the economy we must first understand each variable separately • Thus we assume that, “everything else remains the same,” in order to understand how demand reacts to price

5. The Demand Schedule and The Demand Curve • Demand schedule • A list showing the quantity of a good that consumers would choose to purchase at different prices, with all other variables held constant • The market demand curve (or just demand curve) shows the relationship between the price of a good and the quantity demanded , holding constant all other variables that influence demand • Each point on the curve shows the total buyers would choose to buy at a specific price • Law of demand tells us that demand curves virtually always slope downward

6. Price per Bottle When the price is $4.00 per bottle, 40,000 bottles are demanded (point A). At $2.00 per bottle, 60,000 bottles are demanded (point B). Number of Bottles per Month The Demand Curve A $4.00 B 2.00 D 40,000 60,000

7. Shifts vs. Movements Along The Demand Curve • A change in the price of a good causes a movement along the demand curve • In Figure 1 • A fall (rise) in price would cause a movement to the right (left) along the demand curve • A change in income causes a shift in the demand curve itself • In Figure 2 • Demand curve has shifted to the right of the old curve (from Figure 1) as income has risen • A change in any variable that affects demand—except for the good’s price—causes the demand curve to shift

8. An increase in income shifts the demand curve for maple syrup from D1 to D2. At each price, more bottles are demanded after the shift Price per Bottle D2 D1 Number of Bottles per Month A Shift of The Demand Curve B C $2.00 60,000 80,000

9. Dangerous Curves: “Change in Quantity Demanded” vs. “Change in Demand” • Language is important when discussing demand • “Quantity demanded” means • A particular amount that buyers would choose to buy at a specific price • It is a number represented by a single point on a demand curve • When a change in the price of a good moves us along a demand curve, it is a change in quantity demand • The term demand means • The entire relationship between price and quantity demanded—and represented by the entire demand curve • When something other than price changes, causing the entire demand curve to shift, it is a change in demand

10. Income: Factors That Shift The Demand Curve • An increase in income has effect of shifting demand for normal goods to the right • However, a rise in income shifts demand for inferior goods to the left • A rise in income will increase the demand for a normal good, and decrease the demand for an inferior good

11. Wealth: Factors That Shift The Demand Curve • Your wealth—at any point in time—is the total value of everything you own minus the total dollar amount you owe • An increase in wealth will • Increase demand (shift the curve rightward) for a normal good • Decrease demand (shift the curve leftward) for an inferior good

12. Prices of Related Goods: Factors that Shift the Demand Curve • Substitute—good that can be used in place of some other good and that fulfills more or less the same purpose • A rise in the price of a substitute increases the demand for a good, shifting the demand curve to the right • Complement—used together with the good we are interested in • A rise in the price of a complement decreases the demand for a good, shifting the demand curve to the left

13. Other Factors That Shift the Demand Curve • Population • As the population increases in an area • Number of buyers will ordinarily increase • Demand for a good will increase • Expected Price • An expectation that price will rise (fall) in the future shifts the current demand curve rightward (leftward) • Tastes • Combination of all the personal factors that go into determining how a buyer feels about a good • When tastes change toward a good, demand increases, and the demand curve shifts to the right • When tastes change away from a good, demand decreases, and the demand curve shifts to the left

14. Price Price increase moves us leftward alongdemand curve Price increase moves us rightwardalongdemand curve Quantity Movements Along The Demand Curve P2 P1 P3 Q2 Q1 Q3

15. Price Quantity Shifts of The Demand Curve • Entire demand curve shifts rightward when: • income or wealth ↑ • price of substitute ↑ • price of complement ↓ • population ↑ • expected price ↑ • tastes shift toward good D2 D1

16. Price Quantity Shifts of The Demand Curve • Entire demand curve shifts leftward when: • income or wealth ↓ • price of substitute ↓ • price of complement ↑ • population ↓ • expected price ↓ • tastes shift toward good D1 D2

17. Calculating Price Elasticity of Demand

18. Since equal dollar increases (vertical arrows) are smaller and smaller percentage increases . . . Price and since equal quantity decreases (horizontal arrows) are larger and larger percentage decreases . . . demand becomes more and more elastic as we move leftward and upward along a straight-line demand curve. Quantity Elasticity and Straight-Line Demand Curves 3 2 1 D

19. (a) Price per Unit Price per Unit $4 $4 Perfectly Elastic Demand 3 3 Perfectly Inelastic Demand 2 2 1 1 20 40 60 80 100 20 40 60 80 100 Quantity Quantity Extreme Cases of Demand (b) D D

20. Effects of Price Changes on Revenue

21. Effects of Price Changes for Laptop Computers

22. Price per Laptop 2. At point B, revenue is $750 million. $3,500 3. Moving from Ato B,expenditure increases, sodemand must be inelasticover that range. 3,000 1. At point A , where price is $1,000 and 600,000 laptops are demanded, revenue is $600 million. 2,500 2,000 1,500 1,000 500 Quantity of Laptops 100,000 200,000 300,000 400,000 500,000 600,000 Elasticity and Total Revenue B A D

23. Some Short-Run Price Elasticities of Demand

24. Adjustments After a Rise in the Price of Gasoline

25. Some Income Elasticities

26. Income and Spending on Economic Necessities and Economic Luxuries

27. Some Cross-Price Elasticities