MARKET DEMAND

Rey Belen Afternoon School August 24, 2010

Buying BehaviorMarket Analysis

Demand

Buying basicsLaw of DemandDemand CurveDeterminantsScarcity

The willingness and ability to buy a range of quantities

of a good at a range of prices, during a given time.

Demand price is the maximum price that buyers would be willing and able to pay for a given quantity of a good.

1. The emphasis is on maximum. Buyers have an upper limit on the price that they would be willing and able to pay for a good.

2. Buyers are willing and able to pay a lower price. In fact, they would be glad to get it for free.

3. The maximum demand price is based on the fact of economic life that people prefer more to less.

Quantity demanded is the specific quantity of a good that buyers would be willing and able to buy at a specific price.

Price and quantity demanded are a pair of numbers that go together.

Quantity demanded is not the same as demand.

•Demand is the entire range of prices and quantities (all pairs of numbers).•Quantity demanded is a specific quantity at a specific price (a quantity paired with a price).•Demand is the entire range of prices and quantities (all pairs of numbers).•Quantity demanded is a specific quantity at a specific price (a quantity paired with a price).

1. Demand is the entire range of prices and quantities (all pairs of numbers).

2. Quantity demanded is a specific quantity at a specific price (a quantity paired with a price

Demand is the range of prices and quantities that buyers are willing and able to buy at different prices.

Buyers must be both willing and able to buy a good to have a demand. Willingness is based on tastes and preferences. Ability is based on income.

Demand includes a range of prices and quantities, not just a specific quantity.

Demand is analyzed during a given time period.Demand price as the maximum price that buyers would

be willing and able to pay for a given quantity.Quantity demanded as the maximum quantity buyers

would be willing and able to buy at a specific price.

The law of demand is an inverse relationship between demand price and the quantity demanded, ceteris paribus.

1. Inverse relationship means that people buy more of a good if the price is lower and less if the price is higher.

2. In terms of scientific method, price causes quantity demanded. A change in the price causes a change in the quantity demanded.

Ceteris paribus means other things remain unchanged.

Law of demand applies exclusively to the relationship between demand price and quantity demanded.

All other things that can affect demand must remain constant to avoid distorting this relationship.

Because demand is affected by many factors other than price, a buyer may buy larger amounts of a good even with a higher price.

Other factors that affect demand are called demand determinants.

Income EffectThis is the change in quantity demanded because a

change in price gives a buyer more real income, even though money income remains unchanged.

Substitution EffectThe substitution effect exists because a change in

the price of a good makes this price relatively higher or lower than the prices of other goods.

The higher the price of a good, then the more expensive it is relative to other goods. The lower the price of a good, then the less expensive it is relative to other goods.

Other prices remain unchanged.The substitution effect is usually more important

than the income effect.

The law of demand, which is a fundamental economic principle stating that demand price and quantity demanded are inversely related, ceteris paribus.

Ceteris paribus, a Latin term meaning that other things remain unchanged. It is used to control for factors other than price, that affect demand.

Why the law of demand works because of the income and substitution effects.

The income effect, which exists because price changes affect the purchasing power of buyers' given incomes.

The substitution effect, which exists because price changes make other goods relatively more or less expensive.

It is table presenting the relationship between demand price and quantity demanded.

Assumptions:Ceteris paribus factors do not change.Data is for a specific time period

First, higher prices go with lower quantities demanded-the law of demand.

Second, the prices and quantities are maximum values.

Third, demand is the whole set of price/quantity pair numbers. Quantity demanded is any single number at the specified price.

By the way, these numbers are hypothetical.

A demand schedule can be use to plot a demand curve

A demand curve has negative slope.

Higher prices correspond with smaller quantities.

The demand curve embodies the law of demand.

The area beneath the demand curve is the demand space.

The curve represents the maximum price that buyers would be willing to pay.

Buyers would be willing to pay less than the demand price on the demand curve, but not more.

Demand schedule, which is a table of price/quantity numbers, can be used to illustrate demand and the law of demand.

Demand curve can be derived from a demand schedule by plotting the price/quantity pairs, and how the negative slope of this demand curve also reflects the law of demand.

Demand space is the area beneath a demand curve and that the demand price on the demand curve is the upper limit of buyers' demand space.

Ceteris paribus is the notion that other things remain constant. We make this assumption because things other than price affect demand.