What is Demand?

1. What is Demand?

2. Demand can be defined as… • The amount of a product that buyers have the desire, willingness, and ability to buy at each prevailing market price. • Just because a buyer would LIKE to have an item doesn’t mean they have the willingness or ability to buy the item. • I would like to own a summer home in the Rockies but I don’t have the ability to pay for one!

3. An example of demand in the Central High School cafeteria! • Almost EVERYONE likes pizza but the DEMAND for pizza changes if the price changes. • If, for example, the current price is $2 per slice, the demand might be 500 slices per day.

4. What would happen if… • The cafeteria manager noticed that many students brought lunch from home because they didn’t like the cafeteria food. In order to entice them to try the cafeteria pizza, she dropped the price to $1 per slice? • The demand for pizza might increase from 500 slices per day to 1500 slices per day. • Why?

5. Increased demand for pizza! • Students would be more likely to choose pizza over the other available foods. • Students would be more likely to buy a second or third slice. • Students would be less likely to bring lunch or order pizza through the office.

6. On the other hand, what if… • The cafeteria manager decided she would concentrate on improving profits. The price of pizza was increased to $3 per slice (remember it was originally $2). • The demand for pizza might drop to 200 slices per day. • Why? • Students would be less likely to buy a second or third slice, more likely to buy something other than pizza, and more likely to bring lunch from home.

7. The Law of Demand states… • The quantity demanded of a good or service varies inversely with its price. • In other words, the higher the price the lower the demand and the lower the price the higher the demand. • Note that on a demand curve, price is always on the vertical axis and quantity demanded on the horizontal axis. • The quantity demanded always slopes downward.

8. The principle of decreasing marginal utility… • Utility is a term economist use to describe the usefulness of an item. • If you could measure on a scale of 1-10 the utility of an ice cold beverage on a hot summer day, after you have been working in the yard for an hour, what would it be?

9. Probably a… • TEN! • How about the utility of a SECOND can on a scale of 1-10? • The point is, the second can would have less utility than the first. • How about a third can?

10. The principle of diminishing returns states that… • The extra satisfaction we receive from the additional consumption of a product diminishes. • Because of this, demand is always limited. Even if the price of a slice of pizza drops to 5 cents, there is a limit to its demand.

11. Change in quantity demanded as opposed to change in demand… • The example of a change in the demand for pizza that we looked at before is an example of a “change in quantity demanded.” • This is different from a “change in demand,” which describes a market change that affects the demand for pizza at EVERY prevailing price. • Think! What might make the demand for pizza increase at EVERY price? Remember, the demand for pizza was 200 slices at $3, 500 slices at $2, and 1500 slices at $1.

12. Examples of a change in demand… • It has been discovered that the consumption of pizza greatly improves one’s health. • Now, at $3 500 slices are demanded, at $2 1000 slices are demanded, and at $1 3000 slices are demanded.

13. Or how about if… • The price of a cafeteria sandwich dropped from $3 to $1. What would be the effect on the demand for pizza? • How might the demand for hamburger buns be affected by a change in the price of beef?