The Economics of

Demand

 The Demand Curve

 Elasticity of Demand
 Changes in Demand

1
 Demand Consider
 Why are newspapers sold in vending
machines that allow you to take more than
one copy?
 How much do you eat when you can eat all
you want?
 What cures ‘spring fever’?
 What economic principle is behind the
saying, “Been there, done that”?
 Why do higher cigarette taxes cut smoking
by teens more than by other age groups?
2
 Objectives
The Demand Curve
 Explain the law of demand
 Interpret a demand schedule and
demand curve

3
 Key Terms
The Demand Curve
 demand
 law of demand
 marginal utility
 law of diminishing marginal utility
 demand curve
 quantity demanded
 individual demand
 market demand
4
 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.

5
 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.

6
 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)

7
 Demand Schedule
and Demand Curve
 Demand versus quantity demanded

 Individual demand

 Market demand

8
 Demand Schedule
Price Quantity Demanded
per Pizza per Week (millions)

a $15 8
b 12 14
c 9 20
d 6 26
e 3 32

9
 Demand Curve for Pizza
a
$15
b
Price per pizza

12
c
9
d
6
e
3
D
0
8 14 20 26 32
Millions of pizzas per week
10
 Individual Demand for Pizzas
(a) Hector (b) Brianna (c) Chris

$12 $12 $12

8 8 8
Price

4 4 4
dH dB dC
1 2 3 Pizzas 1 2 1
(per week)

11
 Market Demand for Pizzas
(d) Market demand for pizzas

dH + dB + dC = D

$12
8
Price

1 2 3 6 Pizzas
(per week)

12
 Objectives
Elasticity of Demand
 Compute the elasticity of demand and
explain its relevance.
 Discuss factors that influence
elasticity of demand.

13
 Computing the
Elasticity of Demand
 Elasticity of demand measures the
percentage change in quantity demanded
divided by percentage change in price.

Percentage change in
Elasticity quantity demanded
of
=
Percentage
demand change in price
14
 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

15
 The Demand for Pizza
$15
Price per pizza

12
9
6
3
D
0
8 14 20 26 32
Millions of pizzas per week
16
 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

17
 Demand Becomes
More Elastic Over Time

$1.25
1.00
Dy
Price per gallon

Dm

Dw
0 50 75 95100 Millions of gallons per day
18
 Selected
Elasticities of Demand
Product Short Run Long Run
Electricity (residential) 0.1 1.9
Air travel 0.1 2.4
Medical care and hospitalization 0.3 0.9
Gasoline 0.4 1.5
Movies 0.9 3.7
Natural gas (residential) 1.4 2.1

19
 Other Determinants of
Demand
 Consumer Income
 The prices of related goods
 The number and composition of
consumers
 Consumer expectations
 Consumer tastes

20
 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.

21
 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

22
 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

23
 Movement along
the Curve
 Movement vs. Shift
 A change in price, causes a movement
along the demand curve, changes the
quantity demanded
 A change in one of the determinants of
demand other than price causes a shift of
a demand curve

24
 Extensions of Demand
Analysis
 Role of time
 Your willingness to pay more for time-
saving goods depends on the opportunity
cost of your time!

25