A Microeconomics Topic

Factors that Determine Demand

Desire: Do I want it?

Ability: Can I afford it?

Willingness: Am I willing to buy it?

Showing Demand

• Demand Schedule: listing of various quantities of a good demanded at all prices in the market at one time

• Demand Curve: A graph showing schedule

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

Law of Demand

• Quantity of a good demanded varies inversely with its price

• Higher price = Lower quantity demanded• Lower price = Higher quantity demanded

Marginal Utility• Margin, marginal always mean CHANGE• Utility means usefulness/satisfaction• Marginal utility: amount of additional

satisfaction you get from each additional unit of a good

• Law of diminishing marginal utility: As you consume more of something you get less added satisfaction from each unit decreasing demand

Factors Affecting Quantity Demanded

• Change in QUANTITY demanded- the market has not changed- no new demand curve– Change in Price Change in QUANTITY

demanded

Figure 4.3A Change in Quantity DemandedFigure 4.3A Change in Quantity Demanded

Change in Quantity Demanded

Factors Affecting Demand

• Change in DEMAND-the market has changed- NEW demand curve (the demand curve has “shifted”) at ALL prices there will be a NEW quantity demanded– Consumer income– Consumer tastes– Substitutes’ prices– Complements’ prices– Consumer expectations– Number of consumers changes

Change in DemandFigure 4.4A Change in DemandFigure 4.4A Change in Demand

Section 3-5

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• Elasticity measures how sensitive consumers are to price changes.

• Demand is elastic when a change in price causes a large change in demand.

Demand Elasticity

• Demand is inelastic when a change in price causes a small change in demand.

• Demand is unit elastic when a change in price causes a proportional change in demand.

Section 3-9

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• Price times quantity demanded equals total expenditures.

• Changes in expenditures depend on the elasticity of a demand curve—if the change in price and expenditures move in opposite directions on the curve, the demand is elastic, if they move in the same direction, the demand is inelastic; if there is no change in expenditures, demand is unit elastic.

The Total Expenditures Test

• Understanding the relationship between elasticity and profits can help producers effectively price their products.

Section 3-9 The Total Expenditures Test (cont.)

Figure 4.5The Total Expenditures Test for Demand ElasticityFigure 4.5The Total Expenditures Test for Demand Elasticity

Section 3-14

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• Demand is elastic if the answer to the following questions are “yes”.

Determinants of Demand Elasticity

– Can the purchase be delayed? Some purchases cannot be delayed, regardless of price changes.

– Are adequate substitutes available? Price changes can cause consumers to substitute on product for a similar product.

– Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumer’s income.

Section 3-15Determinants of Demand Elasticity (cont.)

Figure 4.6Estimating the Elasticity of DemandFigure 4.6Estimating the Elasticity of Demand

Supply

• The amount of output that producers are willing to bring to market at each and every price

• Law of Supply: Higher priceHigher quantity supplied; Lower priceLower quantity supplied

Figure 5.2Figure 5.2

Figure 5.1Figure 5.1

A change in quantity supplied is the change in amount offered for sale in response to a change in price.

Producers have the freedom, if prices fall too low, to slow or stop production or leave the market completely. If the price rises, the producer can step up production levels.

Changes in Supply• Change in supply means at ALL prices

there are different quantities supplied• Causes of change in supply

– Change in cost of inputs– New technology– Producer expectations– Government Actions

• Taxes• Regulations• Subsidies

• A change in supply is when suppliers offer different amounts of products for sale at all possible prices in the market.

Figure 5.3Figure 5.3

Elastic Types

Figure 5.4aFigure 5.4a Figure 5.4cFigure 5.4c

Figure 5.4bFigure 5.4b