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Economics - Demand Notes

Introduction to Demand

• Supply and demand are key components of a market economy.
• Demand is created by consumers for a good or service.
• Demand is the desire , ability , and willingness to buy a product.
• All three conditions must be met for demand to be present.

• Example: You will buy more iTunes music at $.99 cents/songthan you would at $4.99/song. You demand more when the price is lower.
• An single person individual will demand varies on the price of a good or demand curve illustrates how the quantity that a service.
• A interested persons market demand curve (the market) will demand varies on the price illustrates how the quantity that all of a good or service.

• Thus, the first unit you buy of something provides the mostsatisfaction, or usefulness.
• Additional units provide less and less satisfaction.
• At some point, the utility of the good or service is worth less than the cost.
• At that point, you stop buying additional units.

Example: You are hungry, so you go to Taco Bell and buy a burrito. The first burrito you buy will provide the most satisfaction, because ithas the most utility (it satisfies your hunger the most). You buy another burrito, but because your hunger has already been partiallysatisfied by the first burrito, it provides less, or diminished, utility. Each additional burrito will provide less and less satisfaction (becauseyou'll be less and less hungry). At some point, burritos won't provide ANY satisfaction because you'll be full. Therefore, you won't buy anymore burritos.

• D1 is the original demand curve.- D2 is the new demand curve.
• Demand has increased because ofsome external change.
• At each and every price, moreunits are demanded.
• Old demand at $14 was 110 units.- New demand at $14 is 160 units.
• Imagine this chart is showing youthe quantity of CD’s demanded for a particular artist. Whatexternal changes could cause more units of a CD to bedemanded at the same price?

Income Effect

• Theon income. income effect is the change in the consumption of goods based
• Consumers will generally spend (demand) more if they experience an increase in income, and they may spend less if their income drops.
• If prices rise, but your income level stays the same, you cannotafford to keep buying (demanding) at previous levels; if prices drop, you can demand more.

• When prices change, people will substitute cheaper items for more expensive items.
• This is why many grocery stores produce their own products, whichthey can sell at a lower price than name brands.
• Example: Coca-Cola 2-liters sell for $2.99, so Safeway sells Signature Select Cola 2-liters for $1.99, knowing many people willsubstitute the cheaper item for the more expensive.
• Consumers are much more likely to purchase substitutes when they experience a drop in income or prices of products increase.

Complements

• A change in demand for a product can lead to a change in demandfor related products, called complements.
• Complements are items that are consumed together, meaning they are used or purchased together.
• Example: If the price of hamburger meat drops, demand increases.
• The demand for buns, mustard, ketchup, and pickles will alsoincrease, even if the price of those items doesn’t change.

• Demand is inelastic when a given change in price causes a relatively smaller change in the quantity demanded.
• Example: The price of insulin goes up 100%, yet the quantitydemanded only decreases 5%.
• The huge change in price has very little effect in the quantity demanded.

• Demand is unit elastic when a given change in price causes a proportional change (1:1) in the quantity demanded.
• Example: The price of movie tickets goes up 15%, and the quantitydemanded decreases 15%.
• There is a 1-to-1 change.

A. Name something that you consider to be elastic. B. Name something that you consider to be inelastic.