Macro Topic 1.4 - Demand 2020

Unit 1:
Basic Economic
Concepts
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ACDC Leadership 2019
Topic 1.4-
Demand
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DEMAND DEFINED
What is Demand?
Demand is the different quantities of goods
that consumers are willing and able to buy at
different prices.
(Ex: You are able to purchase diapers, but if you
aren’t willing to buy them then there is NO
demand).
What is the Law of Demand?

There is an INVERSE relationship between
price and quantity demanded.
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Why does the Law of Demand occur?
The law of demand is the result of three

separate behavior patterns that overlap:
1. The Substitution effect
2. The Income effect
3. The Law of Diminishing Marginal
Utility
We will define and explain each…
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Why does the Law of
Demand occur?
1. The Substitution Effect
• If the price increases for a product,
consumers buy less of that product and
more of another substitute product (and
vice versa).
2. The Income Effect

• If the price decreases for a product, the
purchasing power increases for consumers,
-allowing them to purchase more.
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Why does the Law of Demand occur?
3. Law of Diminishing Marginal Utility
• Diminishing = decreasing
• Marginal = additional
• Utility = satisfaction
• We buy goods because we get utility from them
• The law of diminishing marginal utility states
that as you consume anything, the additional
satisfaction that you will receive will eventually
start to decrease.
• Example:
https://www.youtube.com/watch?v=PkCs5HsC
NhA (2:45-3:50)
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Graphing Demand
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The Demand Curve
• A demand curve is a graphical representation
of a demand schedule.
• The demand curve is downward sloping,
showing the inverse relationship between price
(on the y-axis) and quantity demanded (on the
x-axis).
• When reading a demand curve, assume all
outside factors, such as income, are held
constant. (This is called ceteris paribus)
Let’s draw a demand curve for milk…
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GRAPHING DEMAND
Demand Price of Milk Draw this large
Schedule $5 in your notes
Quantity
Price
Demanded 4
$5 10
3
$4 20
2
$3 30
1
$2 50
$1 80 10 20 30 40 50 60 70 80 Q
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Quantity Demanded of Milk 9
GRAPHING DEMAND
Demand Price of Milk
Schedule $5
Quantity
Price
Demanded 4
$5 10
3
$4 20
2
$3 30
1
$2 50
Demand
$1 80 10 20 30 40 50 60 70 80 Q
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Quantity Demanded of Milk 10
Shifts in Demand
• Ceteris paribus-“all other things held constant.”
• When the ceteris paribus assumption is
dropped, movement no longer occurs along the
demand curve. Rather, the entire demand curve
shifts.
• A shift means that at the same prices, more
people are willing and able to purchase that
good.
This is a change in demand, not a change in
quantity demanded!
PRICE DOESN’T SHIFT THE CURVE
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Change in Demand
Schedule $5
What if milk
Price
Quantity makes you
Demanded 4
$5 10
smarter?
3
$4 20
2
$3 30
1
$2 50
Demand
$1 80 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 12
Change in Demand
Schedule $5
What if milk
Price
Quantity makes you
Demanded 4
$5 10
smarter?
3
$4 20
2
$3 30
1
$2 50
Demand
$1 80 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 13
Change in Demand
Schedule $5
Quantity
Price
Demanded 4
$5 10 30
3
$4 20 40
2
$3 30 50
$2 50 70 1
Demand
$1 80 100 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 14
Change in Demand
Schedule Increase in Demand
$5
Prices didn’t change but
Quantity people want MORE Milk
Price
Demanded 4
$5 10 30
3
$4 20 40
2
$3 30 50 D1
1
$2 50 70
Demand
$1 80 100 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 15
Change in Demand
Schedule $5
What if milk
Price
Quantity causes baldness?
Demanded 4
$5 10
3
$4 20
2
$3 30
1
$2 50 Demand
$1 80 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 16
Change in Demand
Schedule $5
What if milk
Price
Quantity causes baldness?
Demanded 4
$5 10
3
$4 20
2
$3 30
1
$2 50 Demand
$1 80 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 17
Change in Demand
Schedule $5
Quantity
Price
Demanded 4
$5 10 0
3
$4 20 5
2
$3 30 20
1
$2 50 30 Demand
$1 80 60 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 18
Change in Demand
Schedule $5
Decrease in Demand
Quantity
Price Prices didn’t change but
Demanded 4
people want LESS Milk
$5 10 0
3
$4 20 5
2
$3 30 20
1
$2 50 30 D2 Demand
$1 80 60 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 19
Change in Demand
Schedule $5 What happens to
Price
Quantity the demand for milk if
Demanded 4
the price of milk
$5 10
3 increases?
$4 20
2
$3 30 NOTHING!
1 The demand
$2 50 Demand
stays the same
$1 80 10 20 30 40 50 60 70 80 Q
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Quantity of Milk 20
What Causes a Shift in Demand?
5 Shifters (Determinants) of Demand:
1. Tastes and Preferences
2. Number of Consumers
3. Price of Related Goods
4. Income
5. Future Expectations (consumer guesses)
A change in PRICE doesn’t shift the curve. It
only causes movement along the curve.
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Prices of Related Goods
The demand curve for one good can be affected by a
change in the price of ANOTHER related good.
1. Substitutes are goods used in place of one
another.
– Ex: If price of Pepsi falls, demand for Coke will…
– If the price of one decreases, the demand for the
other will decrease (or vice versa).
2. Complements are two goods that are bought
and used together.
– Ex: If price of hot dogs falls, demand for hot dog
buns will...
– If the price of one decreases, the demand for the
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other will increase (or vice versa).
Income
The incomes of consumers change their demand,
but how depends on the type of good.
1. Normal Goods
– Ex: New cars, seafood, jewelry
– As income increases, demand increases
– As income falls, demand falls
2. Inferior Goods
– Ex: Ramen, used cars, used clothes
– As income increases, demand falls
– As income falls, demand increases
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Practice Questions
1. Which of the following will cause the
demand for milk to decrease?
A. Increase in the price of a substitute
B. A decrease in income assuming that milk
is a normal good
C. A decrease in the price of milk
D. An increase in the price of milk
E. A decrease in the price of a
complementary good
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Practice Questions
2. Which of the following will cause the
quantity demanded of milk to decrease?
A. Increase in the price of a substitute
B. A decrease in income assuming that milk is
a normal good
C. A decrease in the price of milk
D. An increase in the price of milk
E. A decrease in the price of a complementary
good
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Practice
Identify the determinant (shifter) then decide if
demand will increase or decrease
Increase or
Shifter Left or Right
Decrease
1
2
3
4
5
6
7
8
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Practice
Hamburgers (a normal good)
1. Population boom
2. Incomes fall due to recession
3. Price of tacos, a substitute, decreases
4. Price increases to $5 for hamburgers
5. New health craze - “No ground beef”
6. Hamburger restaurants announce that they
will significantly increase prices NEXT month
7. Price of fries, a complement, increases
8. Restaurants lower price of burgers to $.50
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Practice
Increase or
Shifter Left or Right
Decrease
1 Number of Consumers Increase Right
2 Income Decrease Left
3 Substitute Decrease Left
4 NO SHIFT Decrease QD Left along curve
5 Taste or Preference Decrease Left

6 Future Expectations Increase Right
7 Complement Decrease Left
8 NO SHIFT Increase QD Right along curve

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Unit 1:

What is the Law of Demand?

The law of demand is the result of three

2. The Income Effect

5 Taste or Preference Decrease Left

7 Complement Decrease Left

8 NO SHIFT Increase QD Right along curve

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