Analysis of Demand

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Demand
Demand indicates how much of a good consumers are willing and able to buy at each possible price during a given time period, other things constant * Planned rate of purchase per period at each possible price * Willing and able to buy is critical to demand

* Different than wants and needs
Law of Demand
Says that quantity demanded varies inversely with price, other things constant * The higher the price, the smaller the quantity demanded * The lower the price, the larger the quantity demanded

Explanations for Law of Demand
* Degree of scarcity of one good relative to another helps determine each good’s relative price * Definition of demand includes the “other things constant” assumption * Among the “other things” are the prices of other goods Substitution Effect

* When the price of a good falls, its relative price makes consumers more willing to purchase this good * When the price of a good increases, its relative price makes consumers less willing to purchase this good * Changes in the relative prices – the price of one good compared to the prices of other goods – causes the substitution effect…you substitute toward the less expensive good.

Income Effect
* Money income
* Number of dollars received per period of time
* Real income
* Income measured in terms of the goods and services it can buy * When the price of good decreases, real income increases…not only do you buy more of the cheaper good, you buy more of other goods as well. * When the price of good increases, real income declines, you buy less of that good and likely less of all other goods because your real income declined. Exhibit 1: Demand Schedule & Demand Curve for Pi

(b) Demand Curve
e
d
c
b
$0
$3
$6
$9
$12
$15
$18
8
14
20
26
32
Millions of Pizzas per week
Price per Pizza
a

(a) Demand Schedule

Price per Quantity Demanded
Pizza per Week (millions)
a) $15 8
b) 12 14
c) 9 20
d) 6 26
e) 3 32

The demand schedule lists possible prices, along with quantity demanded at each price. The demand curve at the right shows each price / quantity combination listed in the demand schedule as a point on the demand curve.

Demand and Quantity Demanded

P
r
i
c
e

p
e
r

q
u
a
r
t
8 14 20 26 32
$15.00
12.00
9.00
6.00
3.00

0

a
b
c
d
e
D
Millions of pizzas per week

* Demand for pizza is not a specific quantity, but rather the entire relation between price and quantity demanded, and is represented by the entire demand curve * An individual point on the demand curve shows the quantity demanded at a particular price. * The movement from say, b to c, is a change in quantity demanded and is represented by a movement along the demand curve and can only be caused by a change in price

Individual Demand And Market Demand
* Individual demand refers to the demand of an individual consumer * Market demand is the sum of the individual demands of all consumers in the market * Important: Unless otherwise noted, we will be referring to market demand

Shifts of the Demand Curve
* Demand curve focuses on the relationship between the price of a good and the quantity demanded when other factors that could affect demand remain unchanged * Money income of consumers
* Prices of related goods
* Consumer expectations
* Number and composition of consumers in the market
* Consumer tastes

Exhibit 2: Increase in the Market Demand

$15
12
9
6
3
Price

0
8 14 20 26
32

Millions of pizzas per week

D
b

D'
f

* Suppose income increases: some consumers will now be able to buy more pizza at each price market demand increases demand shifts to the right...
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