2. OutlineOutline
I. What is Demand?
A. The Circular Flow Diagram
B. Demand Schedules
C. The Law of Demand
D. Demand Curves/Market Demand
II. Change in Demand vs. Change in Quantity
Demanded
A. Change in Demand
B. Change in Quantity Demanded
3. The Circular Flow DiagramThe Circular Flow Diagram
• We can simplify the whole economy into
what is called the Circular Flow Diagram
• The Circular Flow Diagram shows the
relationship between what people want to
buy and what firms are willing to sell
4. Resource
Market
The Circular Flow DiagramThe Circular Flow Diagram
Product
Market
HouseholdsFirms
For Instance, Compact
Discs -- Households
Want To Buy (Demand)
Them and Firms Want
to Sell (Supply)Them.
To Produce Compact
Discs -- Firms Want
To Buy (Demand)
Labor and Households
Want to Sell (Supply) it.
Demand
Demand
Supply
Supply
5. What is Demand?What is Demand?
As we discussed earlier - there is a limited
amount of goods out there. So how do we
decide what we want? The concept of
demand captures this issue. Demand is
made up of two elements:
– Desire for Goods and Services
– Means to purchase those Goods and Services
6. Demand SchedulesDemand Schedules
• Let consider how many CDs you might
demand in a month. (This is called
“Quantity Demanded”)
• We will first look at this information in a
table called a “Demand Schedule”
• Demand Schedule - a table showing the
relationship between the price of a good and
the quantity demanded per period of time,
ceteris paribus.
11. Law of DemandLaw of Demand
• Law of Demand - the price of a product (or
service) is inversely related to the quantity
demanded, ceteris paribus.
12. Demand Schedules and CurvesDemand Schedules and Curves
• Another way of characterizing Demand
instead of using a schedule is a Demand
Curve.
• Demand Curve - a diagram showing the
relationship between the price of a good and
the quantity demanded per period of time,
ceteris paribus.
20. Market Demand CurveMarket Demand Curve
• The demand curve we just drew was the
Demand for CDs by one person.
• Market Demand Curve - a curve showing
the relationship between the price of a good
and the total quantity demanded by all
consumers in the market per period of time,
ceteris paribus.Market demand curves are
obtained by summing the demand curves of
individual consumers.
21. Market Demand ScheduleMarket Demand Schedule
• Market Demand Schedule - a table showing
the relationship between the price of a good
and the total quantity demanded by all
consumers in the market per period of time,
ceteris paribus.
• Market demand schedules are obtained by
summing the demand schedules of
individual consumers.
26. Change in D vs. Change in QChange in D vs. Change in Qdd
• Change in Demand - a change in the desire
or means to purchase the good, thus there is
a change in quantity demanded at EVERY
price.
• Change in Demand - a shift of the demand
curve
• A demand curve is drawn under the
assumption of ceteris paribus.
• When this assumption is relaxed, the entire demand
curves shifts
27. Change in D vs. Change in QChange in D vs. Change in Qdd
• Changes in Demand
• Increase in demand - demand curve shifts to the
right
• Decrease in demand - demand curve shifts to
the left
28. Change in DemandChange in Demand
• Factors Which Cause a Change in Demand
– Number of Buyers
– Tastes and Preferences
– Income
– Price of Other Goods
– The Availability of Credit
– Expectations about Future Prices
29. Change in Demand - Number ofChange in Demand - Number of
BuyersBuyers
The more buyers in the market for a good, the
greater the total quantity demanded (by the
whole economy) of the good at a given
price. Since the quantity demanded is
higher at every given price, the demand has
increased.
Likewise, if there are less buyers in the
market there is less quantity demanded at
every price, so demand has decreased.
30. Change in Demand - Tastes andChange in Demand - Tastes and
PreferencesPreferences
• Let’s say we find out listening to CDs can
improve your hearing, or what if suddenly
CDs become very fashionable to buy? If
consumers prefer a good more, the demand
for the good increases (a rightward shift of
the demand curve).
• What if we find out CDs emit dangerous
radiation? If consumers prefer a good less,
the demand for the good decreases (a
leftward shift of the demand curve).
31. Change in Demand - IncomeChange in Demand - Income
• Let’s say that you graduate from Miami and
start making a substantial income. What
might we expect to happen to the amount of
CDs you would want to buy?
– It would increase! You would be willing and
able to purchase more CDs at every price. Thus
we say that Demand increased.
32. Change in Demand - IncomeChange in Demand - Income
• Let’s say that after a year at your new job
the boss cuts salaries by 30%. What
happens to Demand?
– It would decrease. You are now have less
means to purchase CDs at all prices.
33. Normal and Inferior GoodsNormal and Inferior Goods
• Given the information we have, we can say
that CDs are a “normal good”
• Normal Good - any good which increases in
demand as income increases (and vice-versa)
• Now let’s consider Macaroni & Cheese. A
fine food that most college students partake
in. What happens to your demand for Mac
and Cheese when you get a job?
– It probably goes down. You will buy better
34. Normal and Inferior GoodsNormal and Inferior Goods
• If your boss cuts your income, though you
might start eating more Mac and Cheese.
This means that Mac and Cheese is an
“inferior good”
• Inferior Good - any good which decreases in
demand as income increases (and vice-versa)
35. Change in Demand - Price ofChange in Demand - Price of
Other GoodsOther Goods
• Mini-Discs are a lot like CDs, but are
recordable. They are presently very
expensive relative to CDs
• What would happen to the Demand for CDs
if the price of Mini-Discs fell?
– The demand for CDs would probably fall since
people would be buying Mini-Discs instead.
36. Change in Demand - Price ofChange in Demand - Price of
Other GoodsOther Goods
• What would happen to the Demand for CDs
if the price of Mini-Discs rose?
– The demand for CDs would probably rise since
people would buy the CDs instead.
• This relationship between CDs and Mini-
Discs implies they are “substitutes.”
• Substitute - a good which can be consumed in
place of another good
37. Change in Demand - Price ofChange in Demand - Price of
Other GoodsOther Goods
• Thus an increase in the price of a substitute
will increase the demand for the good
• And a decrease in the price of a substitute
will decrease the demand for the good
38. Change in Demand - Price ofChange in Demand - Price of
Other GoodsOther Goods
• What if the price of CD Players goes up?
What ought to happen to the demand for
CDs?
– It ought to go down, since people need CD
players to play CDs. If the price of CD players
rises, the quantity demand of CD players will
go down. If less people have CD Players, then
there are less people in the market for CDs.
39. Change in Demand - Price ofChange in Demand - Price of
Other GoodsOther Goods
• What if the price of CD Players goes down?
– The demand for CDs ought to go up, since
more CD players are being used.
• This relationship between CDs and CD
Players implies they are “complements.”
• Complement - a good which is consumed along
with the consumption of another good
40. Change in Demand - Price ofChange in Demand - Price of
Other GoodsOther Goods
• Example - Peanut Butter and Jelly are
complements.
• If price of peanut butter increases, consumers
purchase less peanut butter
• Law of demand tells us this
• Result - Consumers purchase less jelly
• Since buy less peanut butter need less jelly for
PB&J sandwiches
41. Change in Demand - Price ofChange in Demand - Price of
Other GoodsOther Goods
• Thus, either of the following will increase
Demand
• Price of a substitute good increases
• Price of a complement good decreases
• And either of the following will decrease
Demand
• Price of a substitute good decreases
• Price of a complement good increases
42. Change in Demand - AvailabilityChange in Demand - Availability
of Creditof Credit
• If it is easier to borrow money (credit cards
have lower interest rates or are easier to
obtain, etc.), do you think people will buy
more or less of a good at a given price?
– Probably more. Since people can buy things
that couldn’t buy before, their means have (in a
sense) increased. So an increase in the
availablity of credit will increase demand.
43. Change in Demand - AvailabilityChange in Demand - Availability
of Creditof Credit
• If it is harder to borrow money, what do
you think will happen to the demand for
CDs?
– It will probably decrease, since people will
have less ability to buy CDs.
44. Change in Demand -Change in Demand -
Expectations about Future PricesExpectations about Future Prices
• If we were to hear a new story about how
CD prices were going to go up next month,
would you buy that CD you have had your
eye on now or later?
– Now. If you know prices will rise, you will
want to buy more now, so you can avoid paying
the higher price in the future. So demand will
increase in response to this information
45. Change in Demand -Change in Demand -
Expectations about Future PricesExpectations about Future Prices
• Likewise, if we hear that CD prices are
going to drop next month, what do we do
now?
– It is likely that we will buy less now, waiting to
buy that new CD until the prices fall next
month, thus demand will decrease.
46. Change in Demand vs. Change inChange in Demand vs. Change in
Quantity DemandedQuantity Demanded
This is a very important distinction. In short -
a change in demand is a shift in the
WHOLE demand curve. People are willing
to buy more (or less) at every price.
47. Change in Quantity DemandedChange in Quantity Demanded
• Change in Quantity Demanded (∆Qd) -
movement along a demand curve
• A change in quantity demanded can only be
caused by a change in the price of the good.
• Changes in Quantity Demanded
• Increase in Qd - a movement to the right along a
demand curve
• Decrease in Qd - a movement to the left along a
demand curve
