1

The Economics of Demand

THE DEMAND CURVE

ELASTICITY OF DEMAND

CHANGES IN DEMAND

CREATED BY : PRAFULL LOKHANDE

Demand Consider 2

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?
 Objectives 3

The Demand Curve

EXPLAIN THE LAW OF DEMAND
INTERPRET A DEMAND SCHEDULE AND DEMAND
CURVE
 Key Terms 4

The Demand Curve

DEMAND
LAW OF DEMAND
MARGINAL UTILITY
LAW OF DIMINISHING MARGINAL UTILITY
DEMAND CURVE
QUANTITY DEMANDED
INDIVIDUAL DEMAND
MARKET DEMAND
Demand 5

 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.
Law of Demand 6

 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.
Law of Demand 7

 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)
Demand Schedule 8

and Demand Curve

 Demand versus quantity demanded

 Individual demand

 Market demand
Demand Schedule 9

Price Quantity Demanded

per Pizza per Week (millions)

a $15 8
b 12 14
c 9 20
d 6 26
e 3 32
Demand Curve for Pizza 10

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
 Individual Demand for Pizzas 11

(a) Hector (b) Brianna (c) Chris

$12 $12 $12

8 8 8
Price

4 4 4
d d d
H B C
1 2 3 Pizzas 1 2 1
(per week)
 Market Demand for Pizzas 12

(d) Market demand for pizzas

d d d D
H + B + C =

$12

8
Price

1 2 3 6 Pizzas
(per week)
 Objectives 13

Elasticity of Demand
COMPUTE THE ELASTICITY OF DEMAND AND EXPLAIN ITS
RELEVANCE.
DISCUSS FACTORS THAT INFLUENCE ELASTICITY OF
DEMAND.
Computing the 14

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
Computing 15

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
The Demand for Pizza 16

$15
Price per pizza

12
9
6
3
D
0
8 14 20 26 32
Millions of pizzas per week
Determinants of 17

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
Demand Becomes 18

More Elastic Over Time

$1.25
1.00
D
Price per gallon

y
D
m
D
w
0 50 75 95 100 Millions of gallons per day
 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

1
Other Determinants of 20

Demand
Consumer Income
The prices of related goods
The number and composition of
consumers
Consumer expectations
Consumer tastes
Changes in Consumer 21

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.
Changes in the Prices of 22

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
Changes in Prices of 23

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
Movement along 24

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
Extensions of Demand 25

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