Demand Demand Schedule P QD 4 lb

Demand

Demand Schedule P QD $4/lb. . 5 million $3/lb. 1 million $2/lb. 2 million Oranges

Law of Demand • As P , QD (As P , QD ) • There is an inverse relationship between P and QD • NOT As P , D • NOT As QD , P • NOT As D , S

Demand Curve P $4 $3 $2 D . 5 m 1 m Oranges 2 m QD

Demand Curve P P 2 QD P 1 D Q 2 QD Q 1 Oranges

Shape and Slope of a Demand Curve • Slope – Negative (slopes downward from l-r) – Why? • Law of Demand (inverse relationship between P and Q) • Why true? – Income Effect – Substitution Effect

Shape and Slope of a Demand Curve • Shape – Curved (not a straight line) – Why? • Law of Diminishing Marginal Utility (the ice cream effect)

A change in price can only cause a change in quantity demanded, not a change in demand. A change in quantity demanded is a movement along the demand curve. Each point on the curve represents the quantity demanded at a particular price.

Changes in Demand • Demand is all the possible quantities consumers are willing and able to buy at various prices. • Therefore, a change in demand is a shift in the whole curve. – An increase in demand is a shift to the right. – A decrease in demand is a shift to the left.

Increase in Demand P People are now willing and able to buy more at all prices. P 2 D 1 D P 1 Q 2 QD Q 3 Q 1 Oranges

Determinants of Demand (causes a change in demand) • Consumer Tastes / Preferences (advertising industry) • Income normal goods inferior goods • Change in the price of a related good Substitutes

Substitutes P P D P 2 QD P 1 D 1 D Q 2 D Q Q 1 Oranges Apples Papples QDapples Doranges Q 2 Q

Determinants of Demand (causes a change in demand) • Consumer Tastes / Preferences (advertising industry) • Income normal goods inferior goods • Change in the price of a related good Substitutes Complements

Complements P P D P 2 QD P 1 D D Q 2 D 1 Q Q 1 Q 2 Jelly Peanut Butter PPB QDPB DJelly Q 1 Q

Determinants of Demand (causes a change in demand) • Consumer Tastes / Preferences (advertising industry) • Income normal goods inferior goods • Change in the price of a related good Substitutes Complements • Future Price Expectations • Number of Consumers

Price Elasticity of Demand P P D D Q Gas Q Movies

Price Elasticity of Demand • Measures how responsive quantity demanded is to a change in price – Gas is inelastic (not very responsive) – Movies are elastic (very responsive) • Determinants of Elasticity – Necessity or Luxury? – Number of Substitutes? – Portion of Budget?

Total Revenue Test • Total Revenue (TR) = P x Q • If P, and TR, then D is inelastic • If P, and TR, then D is elastic • If P, and n/c TR, then D is unit elastic

Total Revenue Test Movie Prices Ticket Price Tickets Sold $6. 00 x 100 = $600 $8. 00 x 80 = $640 (inelastic) $8. 00 x 50 = $400 (elastic) $8. 00 x 75 = $600 (unit elastic)