The Economics of

Demand

 The Demand Curve

 Elasticity of Demand
 Changes in Demand

1
 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.

2
 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.

3
 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)

4
 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

5
 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
6
 Market Demand for Pizzas
(d) Market demand for pizzas

$12
8
Price

1 2 3 6 Pizzas
(per week)

7
 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
8
 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

9
 The Demand for Pizza
$15
Price per pizza

12
9
6
3
D
0
8 14 20 26 32
Millions of pizzas per week
10