Demand

2.1
Quant. Total MB of Mu/P Quant Total MB of MU/P
Of X Benefit good X of X of Y Benefit good Y of Y
from X from Y
0 $0 0 $0

1 $16 $16 $4 1 $10 $10 $5

2 $28 $12 $3 2 $18 $8 $4

3 $36 $8 $2 3 $24 $6 $3

4 $40 $4 $1 4 $28 $4 $2

5 $41 $1 $.25 5 $30 $2 $1

 Law of Demand
• Law of Demand- a decrease in the price of
the good causes an increase in the quantity P
demanded. Or, an increase in price causes a
decrease in the quantity demanded (Qd)
• Important note- this is NOT a change in
demand, it’s a change in quantity
demanded.
• Demand curves slope downward and show D
the relationship between price and quantity
demanded. Q
• Buyers determine demand
 Demand schedule
Price

Price Quantity
$5
$1 90

$2 80 $4

$3 70 $3
$4 60
$2
$5 50
$1
D
50 60 70 80 90 Quantity
 3 Reason demand curves slope downward
1. Diminishing Marginal Utility- the more of a
good the consumer has, the less the
marginal utility of an additional unit.
(satisfaction)
2. Income Effect- When the price of a good
falls, consumers experience an increase in
purchasing power.
3. Substitution Effect- When the price of a
good increases, people will substitute less
expensive goods.
Market Demand- adding together the quantities that
all consumers in the marketplace are willing to buy at
each price
P
Price Mike Robert Jose Market $6
Q
$5

$1 5 8 7 20 $4
$2 4 6 6 16
$3
$3 3 5 4 12
$2
$4 2 4 3 9
$1 D
$5 1 3 2 6
Q
$6 0 2 1 3 2 4 6 8 10 12 14 16 18 20
 Reasons for a change in demand

• 1- Change in Income-
• If the good is a normal good-
as income increases, D
increases
• If the good is inferior, as
income increases demand
for the good decreases. (Or
as income decreases
demand for the good
increases)
 Reasons for a change in demand
• 2- Change in the price of substitute goods- When a fall in the
price of one good reduces the demand for another good, the
two goods are called substitutes.
Examples of substitute goods- steak/chicken, pencils/pens.
Canned peas

Canned beans
 Reasons for a change in demand
• 3- Change in the price of
complimentary goods Complimentary
goods are goods that are used together
• If the price of the compliment
increases, demand for the good
decreases.
• Examples- peanut butter/jelly, falafel
and hummus
If the price of jelly increases, demand
for peanut butter decreases
Reasons for a change in demand
• 4- Change in the number of
buyers- if the number of buyers
increases, demand for goods
increase
• Example- if the population of
Durango CO increased, the
demand for pizza would
increase. (More buyers)
 Reasons for a change in demand
• 5- Change in Expectations- if people expect the price
of the good to increase, demand will increase now.
• Example- if people expect the price of gas to increase
next week, they will buy more gas today.
• Remember- price can’t affect demand, it affects
quantity demanded. However, the expectation of a
price change can affect current demand.
Reasons for a change in demand
• 6- Change in Styles/Tastes- as styles change over
time, so does demand for goods/services.
Price Price

D’
D D’ D

Quantity Quantity
Increase in Demand Decrease in Demand
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