�The Economics of Demand

• The Demand Curve
• Elasticity of Demand
• Changes in Demand

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Demand

• Demand indicates how much of a product consumers are both willing and able to buy at each possible price during a given period, other things remaining constant.

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Law of Demand

• The law of demand says that quantity demanded varies inversely with price, other things constant. Thus, the higher the price, the smaller the quantity demanded.

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Law of Demand

• Demand, wants, and needs 
• Substitution effect
• The change in the relative price (the price of one good relative to the prices of other goods) causes the substitution effect
• If all prices changed by same margin, there would be no substitution effect
• Income effect
• Money income – the number of dollars you receive per period
• Real income – measure in terms of how many goods and services you can buy
• Diminishing marginal utility
• Marginal utility – additional satisfaction you derive from each item
• Law of marginal utility you derive from each additional item consumed decreases as your consumption increases (example: pizza slices)

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Demand Schedule �and Demand Curve

• Demand versus quantity demanded

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• Individual demand

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• Market demand

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Demand Schedule

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Demand Curve for Pizza

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Market Demand for Pizzas

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Elasticity of Demand

• Compute the elasticity of demand and explain its relevance.
• Discuss factors that influence elasticity of demand.

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Objectives

Computing the �Elasticity of Demand

• Elasticity of demand measures the percentage change in quantity demanded divided by percentage change in price.

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Computing �Elasticity of Demand

• Elasticity values
• >1 it is elastic
• Percentage change in price will result in larger percentage change in the quantity demanded
• =1 it is unit-elastic
• <1 it is inelastic
• Demand is usually more elastic at higher prices and less elastic with lower prices
• Elasticity and total revenue
• Price x’s quantity demanded at that price

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The Demand for Pizza

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Determinants of �Demand Elasticity

• Availability of substitutes
• The greater the availability of substitutes for a good, the greater the good’s elasticity of demand
• Share of consumer’s budget spent on the good
• Increase in prices reduced the demand because people are not both willing and able to purchase @ higher prices
• A matter of time
• The longer the adjustment period, the greater the consumer’s ability to substitute
• Some elasticity estimates
• The elasticity of demand is greater in the long run because consumers have more time to adjust

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Demand Becomes �More Elastic Over Time

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Selected �Elasticities of Demand

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Other Determinants of Demand

• Consumer Income
• The prices of related goods
• The number and composition of consumers
• Consumer expectations
• Consumer tastes

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Changes in Consumer� Income

• If income ↑, consumers willing and able to buy more which ↑ demand
• Demand curve shifts to the right
• Two categories of goods:
• Normal goods – demand increases as money income increases
• Inferior goods – demand decreases as money income increases
• Examples: used clothing, bus rides, etc.

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Changes in the Prices of Related Goods

• Substitutes
• Decrease in price of one item will reduce the demand for a substitute
• Example: Tacos and Pizza
• Complements
• Certain goods used together
• Example: airline tickets and car rentals
• A decrease in the price of one shifts the demand of the other rightward

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Changes in Prices of Related Goods (cont)

• Changes in size or composition of the population will increase demand and shift the curve to the right
• Changes in consumer expectations can shift the demand curve to the left or the right
• Changes in consumer tastes
• Tastes are your likes and dislikes as a consumer

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