3.02 Demand

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Demand

What is Demand?

Remember from the introduction that demand in economics has two parts. People must have:

1. desire / willingness
2. ability

to purchase a good or service for demand to be created.

Based on the definition of demand, which of the objects below would the average consumer be most likely to demand and why?

Individual Demand Schedule

A demand schedule is a table that shows the relationship between the price of the good and the quantity demanded of that good. The labels in the schedule or table will be the exact labels you will use when constructing the demand graph.

The demand schedule below illustrates that a certain consumer would not buy any cupcakes at a price of $25 or $30, but would buy one if the price dropped to $20, and even more would be sold if the price was only five dollars.

Price Per Cupcake	Quantity Demanded
$30	0
$25	0
$20	1
$15	3
$10	5
$5	8

Individual Demand Curve

The demand schedule information from the cupcake example can also be shown in graph form. The graph is called the individual demand curve, which is a curve that shows the relationship between the price of a good and the quantity demanded of a good. The demand curve is downward sloping to the right. Remember...demand goes down.

In this example, the demand curve slopes downward. This shows that people are normally willing to buy less of a product at a high price and more at a low price.

According to the law of demand, quantity demanded and price move in opposite directions.

Law of Demand

The Law of Demand is a law that states that, other things equal, the quantity demanded of a good falls when the price of the good rises. The relationship between price and quantity demanded is therefore inverse.

A high price discourages people from buying a product. As the price of a product rises, consumers will buy less of it.

Market Demand Curve

Remember that an individual demand curve is a graph showing the quantity of demand for a certain individual at each price that might be used in the market at a given time. Sometimes we need to know the quantities demanded by everyone who is interested in buying a product. Such a demand curve is called the market demand curve.

Demand and Marginal Utility

Utility is the amount of usefulness/satisfaction one gets from using a product.

Marginal utility is the extra usefulness/satisfaction one gets from getting or using one more unit of a product.

Diminishing Marginal Utility

We buy things because we feel the product is useful to us. However, as we use more and more of a product, we experience diminishing marginal utility. The principle of diminishing marginal utility states that the satisfaction we gain from buying a product lessens as we buy more of the same product.

As we use more of a product, we are not willing to pay as much for it. Therefore, the demand curve is downward sloping.

Review

You should be able to:

• Explain the relationship between the demand schedule and demand curve.
• Explain how the slope of the demand curve can be explained by the principle of diminishing marginal utility.

Factors Affecting Demand

A number of factors can cause demand to increase or decrease.

The demand curve is just a graphical representation of how much of a product people are willing and/or able to buy at all possible market prices. However, something might happen to change people's willingness and/or ability to buy. These changes are usually of two types:

• A change in the quantity demanded.
• A change in demand.

Change Quantity Demanded

The change in quantity demanded shows a change in how much of a product is purchased when the price of the product changes. Consumers change the quantity we demand for a product when the price changes.

• At a high price, we demand less.
• At a low price, we demand more.

What made this happen? Price. You changed the quantity demanded for a good in response to a change in price. Happens all the time! This is referred to movement along the curve.

Open Graphing Change in Quantity Demanded in a new tab

The income effect means, as prices drop, consumers are left with extra real income and are able to purchase more goods/services. The substitute effect means price can cause consumers to substitute one product with another similar but cheaper item.

Look at the graph to the right. Notice that as price goes down, quantity demanded goes up.

Change in Demand

The entire market demand changes so much so that we need an entirely new curve showing that at each and every price, we want more or less demand. What could possibly have happened to have caused a shift of the original demand curve? Price? No, that changes our quantity that we are demanding. Here we are looking for a change in demand. The causes of curve shifts are collectively referred to as the non-price determinants of demand.

• More demand: Curve shifts to the right.
• Less demand: Curve shifts to the left.

The non-price determinants of demand follow the acronym TRIBE. In the TRIBE acronym, every letter stands for one of these non-price determinants. Note the orange letter to help you connect the text with the acronym.

• Consumer Tastes: As our tastes change, so does the entire demand curve at each and every price.
  • Imagine what would happen to the demand for ice cream if the following headline appeared in the local newspaper: Eating ice cream cures baldness in men! This headline would obviously shift the demand curve for ice cream to the right indicating that at each and every price, more ice cream is demanded and the price was NOT the motivation.
  • A left shift, less demand, would result if the headline instead read: Eating ice cream causes baldness in men.
• Prices of Related Goods: These fall into two categories. (The more you study these definitions as provided, the more chance you have of understanding the concept.)
  • Substitute Goods: When the price of good A rises, the demand of the substitute good increases.
    • Examples of substitute goods: Coke and Pepsi; fruits in general; pork and beef.
    • For example: When the price of Coke rises, the demand of Pepsi increases. The complete opposite is also true.
    • Thus the relationship is direct. The price of Good A rises, the demand of Good B rises. The price of Good A falls, the demand of Good B falls.
  • Complementary Goods: When the price of good A rises, the demand of the complementary good falls.
    • Examples of complementary goods: Computers and software; cameras and film; razors and razor blade; grills and charcoal.
    • For example: When the price of cameras rises, the demand for film falls.
    • Thus the relationship is inverse. The price of Good A rises, the demand of Good B falls. The price of Good A falls, the demand of Good B rises.
• Consumer Income: As we earn more, we buy more; as we earn less, we buy less. So if you received a huge raise tomorrow, wouldn't you buy more at each and every price? What caused this: the price of the item or your new income? The answer is the latter (your new income), and that is why we need a new curve.
  • Of course, this assumes the goods are normal; we react by purchasing more because of our improved income.
  • Some goods are inferior, however, and we react by purchasing more when our income has fallen. Examples of inferior goods are bologna, used clothing, and rice.
• Number of Buyers in the Market: The more buyers, the more demand. The fewer buyers, fewer demand. For example, the demand curve for restaurant meals in New Orleans shifted to the left after Hurricane Katrina severely damaged much of the city in 2005; however, at this time, the demand curve likely shifted to the right in Houston, where many of the evacuees fled after the hurricane.
• Consumer Expectations: Consumers who are smart will oftentimes try to anticipate changes in the marketplace when making buying decisions.
  • For example, if you knew that the price of tires would increase by the end of the year due to higher prices for rubber, then the demand for tires today would increase.
  • Likewise, if you knew that the price of a product like swimsuits would like decrease in the fall of the year, you might delay your purchase until that time, thus shifting the demand curve for swimsuits today to the left.

Definition Help!

What is the difference between a change in the quantity demanded and a change in demand? Aren't these the same?

1. A change in the Qd (Quantity Demanded) is movement along the curve. We change our quantity (amount) we are demanding in response to a change in price. Example: I go to the store to buy fruit and respond to a price change by selecting bananas instead of apples.
2. A change in demand is much bigger. Changes in demand occur because of the non-price determinants of demand, namely TRIBE: change in consumer tastes, prices of related goods (substitutes and complements), change in income, change in the number of buyers, and a change in buyer expectations. This is not movement along the downward sloping demand curve, but instead requires an entirely new curve to be drawn. Thus, the demand curve will shift to the right if demand has increased or shift to the left if demand has decreased. The market is buying more at each and every price or less at each and every price.

Review

For the following events 1-5, identify:

1. whether the event is a change in the quantity demanded or a change in demand,
2. if it is a change in demand, list the determinate that caused the change in demand, and
3. indicate whether the curve shifted to the right (increased demand) or left (decreased demand).

1. Low-rise jeans go out of style. Check Answer
2. The price of hotdogs goes down. Which graph represents what would happen to the demand for hotdog buns? Check Answer
3. A population boom hits and the children reach school age. What effect would that have on the demand for teachers? Check Answer
4. A recession lowers incomes across all levels. Which graph shows the effect on cruise vacations? Check Answer
5. Travelers expect the price of airline tickets to go down next month. What effect would that have on airline tickets now? Check Answer