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Demand

Demand. Chapter 2. 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

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Demand

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  1. Demand Chapter 2

  2. 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.

  3. Individual’s Demand for Gasoline (based on individual’s willingness to pay) Depends on, • Individual’s Income • Price of Gasoline • Prices of Related Goods (automobiles, bus ticket, etc.) • Individual’s Tastes/Preferences • Individual’s expectation of future prices

  4. Market Demand for Gasoline Obtained by summing all individual demands. Depends on, • All factors that affect individuals’ demands • Number of Individuals (population)

  5. Graphing Demand • The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded - fixing all the other factors that affect quantity demanded. • Thedemand curveisthe line relating price to quantity demanded - fixing all the other factors that affect quantity demanded.

  6. Graphing Demand P=Price of Gas = $/Q D Q=Quantity of Gas

  7. Law of Demand •  Is the relationship between price and quantity demanded positive or negative? Negative (Price and quantity demand move in opposite directions) • Law of demand More of a good will be demanded, the lower its price.

  8. Change in quantity demanded • results from a change in price, all else equal • shown as a movement along the demand curve

  9. Change in demand • results from a change in a factor other than price • shown as a shift of the entire demand curve

  10. Notation • D=Demand • QD=Quantity Demanded

  11. Example of Change in Demand due to income change • Income Increases • At every price, do people want to buy more or less? • For Gasoline, More! • Demand increases • Shifts right D1 D0

  12. Normal Good A good for which demand increases when income increases • Examples: Premium Beers and wine Disneyland Gasoline Lego Robotic

  13. Income Increases for an Inferior Good Inferior goods are goods where demand decreases when income increases. • Examples: Pabst Blue Ribbon Beer Certain Products at Wal-Mart Generic Diapers Yugos (perhaps)

  14. P Q Income Increases for an Inferior Good • Income Increases • At every price, do people want to buy more or less? • Less! • Demand decreases • Shifts left D1 D0

  15. Change in demand due to change in the price of a related good • Substitutes Two goods that satisfy similar needs or desires • Examples: Diet Pepsi and Diet CokeStrawberries and Raspberries Gasoline and Manual Lawn Mowers

  16. P Q Change in demand due to change in the price of a related good: Substitutes • Price of a substitute good decreases • Demand Decreases • Shifts Left D0 D1

  17. Change in demand due to change in the price of a related good: Substitutes • What happens if the price of a substitute increases? Demand Increases/Shifts Right

  18. Change in demand due to change in the price of a related good: • Complements Two goods that are used jointly in consumption. • Examples: Tires and Gasoline Tires and Automobiles Beer and Pizza

  19. P Q Change in demand due to change in the price of a related good: Complements • Price of a complementary good decreases • Demand Increases • Shifts right D1 D0

  20. Change in demand due to change in the price of a related good: Complements • What happens if the price of a complement increases? Demand decreases/Shifts left

  21. Change in demand due to... • Tastes: • Positive Change • demand increases • shifts curve right • Negative Change • demand decreases • shifts curve left

  22. Change in demand due to... • Population... • Increase • demand increases • shifts curve right • Decrease • demand decreases • shifts curve left

  23. Change in demand due to... • Expected: • Price Increase • demand increases • shifts curve right • Price Decrease • demand decreases • shifts curve left

  24. Change in demand • results from a change in a factor other than price • shown as a shift of the entire demand curve • change in anything other than price

  25. Demand = Willingness to Pay P=Price of Gas = $/Q (The value consumers get from a good but do not have to pay for.) Consumer Surplus P= D Q=Quantity of Gas

  26. Demand Function for Good X • QDx = f(Px, PY, M, H1 , H2, …) where, Px is the price of good X, PY is the price of good Y, M is income, H1 is size of population, H2 is consumers’ expectations,… • On the prior graph for gasoline, QDx = 10 - Px

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