What is Demand?

Introduction to the Law of Demand

Three Characteristics of Demand
1. Desire

2. Ability

3. Willingness


To purchase a product
The Law of Demand
The quantity demanded
of a good or service
varies inversely with its
price.
A.K.A.
Higher price, less
quantity demanded
Measuring Demand
Develop a Demand
Schedule
A listing that shows
various quantities
demanded for a particular
product at different price
levels.
How to Show a Demand
Schedule
Graphing a Demand Curve
Shows quantity demanded
at every price level
Characteristics
Price as the Y-Axis
Quantity as the X-Axis
All price levels present on
the line
ALWAYS downward sloping
How to Graph Market Demand
More concerned with
Market Demand over
Individual Demand
Shows quantity
demanded by everyone
interested in purchasing
the product
Equation
Add up all individual
demands and graph at
each price point
Factors Affecting Demand
Shifting from Point A to Point B
Change in the Quantity Demanded
A movement along the demand curve
Shows the change in quantity in response to a
change in price.
Ex. A to B
Determinants of Demand
1. The Income Effect/Consumer Income
2. The Substitution Effect
3. The Complementary Effect
4. Preference
5. Change in Expectations
6. Number of Consumers
The Income Effect/Consumer Income
Price decreases, people can buy more!
People feel richer





Consumer Income
Income increases, people can literally buy more.

The Substitution Effect
Change in the relative price of a product.
Example Doritos Cool Ranch Chips
On sale: 2 for $5.00
Substitutes: Each bag= $3.99
The Complementary Effect
Related goods to a specific product
As one increases in demand, so does
the other
Preference
A greater liking for one alternative over
another or others.
Change in Expectations
The way people think about the future.
Examples:
Supply Shortages

Weather

Technological Advances
Number of Consumers
Related to market demand
A change in demand by anyone that leaves the
market and purchases an alternative product.
Change in Demand
Demand completely shifts due to one of the
determinants of demand.
Ex. A to A1 and B to B1
Elasticity of Demand
To be Elastic or Not to be!
What is Demand Elasticity?
Change in price
causes a change in
demand
Example
When price decreases,
demand for that item
will usually increase.
When price increases,
demand for that item
will usually decrease.

Elastic Demand
A change in price causes a relatively large
change in quantity demanded.
Example
Pizza
Inelastic Demand
A change in price causes a relatively small
change in the quantity demanded.
Example
Gas
Unit Elastic Demand
A change in price causes a proportional
change in quantity demanded.
Example
5% change in price
results in 5% change
in quantity
Determinants of Demand Elasticity
1. Can the purchase be delayed?
2. Are adequate Substitutes Available?
3. Does the purchase use a large portion of
income?
Can the purchase be delayed?
If yes, demand is elastic



If no, demand is inelastic
Are adequate Substitutes Available?

More substitutes available= elastic demand
Fewer substitutes available= inelastic demand
Does the purchase use a large portion
of income?
If yes, then demand is elastic
If no, then demand is inelastic