2.

1 The Demand Curve

Introduction:
The primary building blocks of a market economy are demand and
supply. Consumers demand goods and services that maximize utility, and
produces supply goods and services that maximize their profit. As consumer
in the Philippine market economy, you demand all kinds of goods and
services. You buy less of a goods when its price increases and more when
the price decreases. This section draws on your own experience as a
consumer to help you understand demand, particularly the demand curve.
Law of demand
• The quantity of a good demanded per period relates inversely to
its price, other things constant.
• Quantity demanded is a term used in economics to describe the
total amount of a good or service that consumers demand over
a given interval of time.
• Quantity demanded varies inversely or negatively, with price,
other things constant.
• The higher the price, the smaller the quantity demanded.
• The lower the price, the greater the quantity demanded.

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Demand
• indicates how much of product consumers are both willing and able to
buy at each price during a given time period, other things constant.
• Because DEMAND pertains to a specific period – a day, a week, a
month – you should think of demand as the amounts purchased per
time period at each price.
• Also notice the emphasis on willing and able.
• Willing – It refers to the desire or willingness of consumers to
purchase a particular good or service.
• Able – It refers to the financial capacity or ability of consumers to
afford and pay for the desired good or service.

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Demand, Wants, and Needs
Consumer demand and consumer wants are not the same thing.
Wants are unlimited. Not is demand the same as need.

Example: You may have outgrown your rubber shoes and need a
new one. But if the price is ₱2000, you may decide your old shoes
will do for now. If the price drops enough say, to ₱1000 – then you
become both willing and able to buy a new one.

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Substitution Effect
What explains the law of demand? Why, for example, does the
quantity demanded increase when the price falls? The explanation begins
with unlimited wants meeting scarce resources. Many goods and services
help satisfy your particular wants.
In a world without scarcity, everything would be free, so you would
always choose the most attractive alternative. Scarcity is the reality, and the
degree of scarcity of one good relative to another helps determine each
good’s relative price.
Notice that the definition of demand includes the other-things-
constant assumption. Among the “other things” assumed to remain
constant are the prices of other goods.

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Substitution Effect
• For example, if the price of pizza declines while other prices remains
constant, pizza becomes relatively cheaper. Consumers are more
willing to buy pizza when its relative price falls. People tend to
substitute pizza for other goods. This is called the substitution effect
of a price change. On the other hand, an increase in the price of the
pizza, other things constant, increases its relative price.
• Remember that 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 the same percent, there would be no
change in relative prices and no substitution effect.

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Income Effect
• Money Income – is simply the number of pesos you receive per
period.
• Real Income – income measured in terms of how much it can buy.
• Price reduction – increases the purchasing power of your income.
• Income effect of a price change – quantity of goods you demand likely
increases

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Income Effect
A fall in the price increases the quantity demanded for a
second reason. If you take home ₱360 a week from a Saturday Job,
your money income is ₱360 per week. Suppose you spend all your
income on pizza, buying four a week at ₱90 each. What if the price
falls to ₱60? At the lower price you can now afford six pizzas a
week. Your money remains at ₱360 per week, but the drop in the
price increases your real income.

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Diminshing Marginal Utility
Situation:
After a long day of school, studies, and sports, you are starved, so
you visit a local pizzeria. That first slice tastes great and puts a serious
dent in your hunger. The second is not quite as good as the first. A third is
just fair. You do not even consider a fourth slice. The satisfaction you
derive from an additional unit of a product is called your marginal utility.
For example, the additional satisfaction you get from a second slice of
pizza is your marginal utility of that slice.

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Diminishing Marginal Utility
• the satisfaction you derive from an additional unit of a product.
• the change in total utility resulting from a one-unit change in consumption of a
good.
• feature of all consumption.
• has wide applications
• More generally, the expressions “Been there, done that” and “Same old, same
old” convey the idea that, for many activities, things start to get old after the
first time. Your marginal utility or marginal benefit, declines.
Law of Diminishing Marginal Utility
• states that the more of a good an individual consumes per period, other things
• helps explain why people buy more when the price declines.

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Demand Schedule and Demand Curve
• Demand - can be expressed as a demand schedule and as a demand
curve. Demand specify the units being measured and the period
considered.
• Demand Curve – A curve or line showing the quantities of a particular
good demanded at various prices during a given time period, other
things constant.
• Note that some demand curves are straight lines, some are crookd
lines, and some are curved lines, but all of them are called demand
curves, and they all slope downward. A demand curve slopes
downward from left to right, reflecting the law of demand.
• Law of Demand – price and quantity demanded are inversely, or
negatively related, other things constant.

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Demand versus Quantity Demanded
• Be careful to distinguish between demand and quantity
demanded. An individual point on the demand curve
shows the quantity demanded at a particular price.
• Quantity Demanded refers to a specific amount of the
good on the demand schedule or the demand curve,
whereas demand refers to the entire demand schedule or
demand curve.
• Quantity Demanded – the amount demanded at a
particular price.

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Individual Demand and Market Demand
• It is also useful to distinguish between individual demand, which is
the demand of an individual consumer, such as you, and market
demand, which sums the individual demands of all consumers in the
market.
• The market demand curve shoes the total quantities demanded per
period by all consumers at various prices. The sum of the individual
demands of all consumers in the market.
• The individual demand is the demand of an individual consumer.
• Markets and Prices – A market exists when buyers and sellers
interact. This interaction determines market prices and thereby
allocates scarce goods and services.

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thank you

Nina Cahulogan
Kimberly Ganda