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DEMAND

How Markets Work

What is Demand?
To want or not to want? That is the question!
Ferrari F-430 Retail: $ 350,000
Rolex Crown Collection

Retail: $ 64, 500

Chloe
Platinum
2ct
Eternity
Ring

ISA Ancona Yacht

Lamborghini Gallardo

Retail: $310,000

List: $14,500,000

$ 5,629.73

Does WANT = DEMAND?


Three Criteria have to be met:
1. Desire
2. Ability
3. Willingness

Demand = the desire, ability, and


willingness to purchase goods and
services (G/S).
The AMOUNT consumers will buy @ various
PRICES!

The LAW of DEMAND


Ceteris paribus, as prices rise, the
QUANTITY DEMANDED falls.
Vice versa
Ceteris paribus, as prices fall, the
QUANTITY DEMANDED increases.

Two Reasons
We call these the:
Income Effect and the Substitution Effect

INCOME EFFECT

As prices go down, consumers real


income goes up! They can buy more
with each dollar.
As prices go up, consumers real
income goes down! They can buy less
with each dollar.

Substitution Effect

As the price for a good or


service increases,
consumers will substitute
another good or service that
is cheaper.

Demand Schedule
A TABLE showing the amount that will be
purchased at various prices.
Price

Quantity

$1.00 10
$2.00

$3.00

Demand Curve
A GRAPH that shows the AMOUNT that will
be purchased at VARIOUS PRICES.

Price of
Ice-Cream
Cone

$3.0
0
2.5
0
2.0
0
1.5
0
1.0
0
0.5
0
0 1

2 3 4 5 6 7 8 9 1
0

1
1

1
2

Quantity
of IceCream

Changes in QUANTITY
Demanded
A change in QUANTITY DEMANDED is
demonstrated by MOVEMENT ALONG a
demand curve caused by a CHANGE IN
PRICE Price
A
P
(P)
QD
1

P2

D1
0
0

Q1

Q2

Quantity Demanded (QD)

What causes a change in quantity


demanded?

A change in price.

The LAW of DEMAND


CETERIS PARIBUS, as prices rise, the
quantity demanded falls and vice versa
along a constant demand curve.
CETERIS PARIBUS means While

one

thing changes (price),


everything else remains the
same.

Will you never be willing or able to


buy this car?

IS DEMAND

Changes in DEMAND
A Change in Demand means:
Consumers purchase more or less products
at EVERY PRICE LEVEL causing a change
in the demand schedule and a shift of the
curve.
Price
(P)

P2
P1

D1
0
0

D2

Quantity Demanded (QD)

D3

Changes in DEMAND
Demand changes when something other
than price changes the market conditions.
Non-price Determinants of Demand
Income of Consumers
Number of Buyers (population changes)
Expectations of Prices or Income in the Future
Prices of Related Goods
Tastes & Preferences of Consumers