Demand

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Introduction to Markets
and Prices

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Market

Definition: Any place where, or

mechanism by which, buyers and
sellers interact to trade goods,
services, or resources.
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How Trade Happens in a

Market

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Sellers
Dont Set
Prices

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Buyers
Dont Set
Prices

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Key Insight
Prices and quantities traded are
determined by the interaction of
buyers and sellers in a market.

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pl
y

PR
E IC

Su
p

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De
ma
nd
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The Demand Curve

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The Law of Demand

Definition: A principle in
economics which states
that as the price of a
good, service, or resource
rises, the quantity
demanded will decrease,
and vice versa, all else
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Demand Schedule
Price

Quantity

16

13

10

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 2016 by McGraw-Hill Education

Price

Quanti
ty

16
13
10
7
4

1
3
5
7
9

13

Demand Curve

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Demand curves
are Downwardsloping
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Discussion Question
Describe a product for which you have
no demand, and explain why.

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The Law of Demand - Marginal

Benefit, Purchasing Power, and
Substitutes

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Three Reasons Demand

Slopes Down

Income Effect
Diminishing

Marginal Utility
Substitution Effect
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Reason 1:
Income
Effect

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Quiz Question
Suppose you have only $20 to spend
on gasoline each week. If the price of
gasoline is $2 a gallon how many
gallons can you purchase?
A) 40 gallons
B) 10 gallons
C) 1/10th of a gallon
D) None of the above

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Quiz Question
Now suppose the price of gasoline
rises from $2 per gallon to $4 per
gallon. You still have $20 to spend
on gas each week, but now how
many gallons can you purchase?
A) 5 gallons
B) 80 gallons
C) 8 gallons
D) None of the above
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Income Effect
Definition: The effect
that a change in the
price of a good, service,
or resource has on the
purchasing power of
income.
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Demand Curve

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2:
Diminish
ing
Marginal
Utility

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As people consume
more of a good during
a fixed time period,
the satisfaction
received from each
additional unit falls.
Each additional slice of
pizza you eat gives you
a little less benefit.
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2:
Diminish
ing
Marginal
Utility

As people consume
more of a good during
a fixed time period, the
satisfaction received
from each additional
unit falls.
Some will argue that
each additional dollar
you earn means a
little less to you.

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2:
Diminish
ing
Marginal
Utility

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As people consume
more of a good during
a fixed time period,
the satisfaction
received from each
additional unit falls.
Each additional orange
you eat gives you a little
less benefit.
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Diminishing Marginal Utility

Definition: The negative
relationship between the
quantity of a good, service, or
resource and the marginal
utility obtained from each
additional unit consumed in a
given period of time.
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Reason 3: If the price of pizza

Substituti goes up do you still
buy pizza, or do
on Effect
you eat elsewhere?

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Substitution Effect
Definition: The effect
that a change in the
price of one good,
service, or resource has
on the demand for
another.
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Quiz Question
For the next few slides
determine which reason
for downward-sloping
demand best explains the
examples given.

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Quiz Question
When the Economics Department
serves all-you-can-eat ice cream at
its annual spring student-recruiting
event, you eat three ice cream
cones. You really enjoy the first, the
second is just okay, and the third is
tasteless.
A) Income Effect
B) Diminishing Marginal Utility
C) Substitution Effect
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Quiz Question
Your parents gave you the $400 you
thought you needed to purchase
books for the semester. When you
realized your books were much
cheaper than you thought, you
decided to purchase all of the
required and recommended books
instead of just a few.
A) Income Effect
B) Diminishing Marginal Utility
C) Substitution Effect

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Quiz Question
When the price of strawberries is
high in the winter you purchase
apples, but in the summer when the
price of strawberries drops you
purchase strawberries.
A) Income Effect
B) Diminishing Marginal Utility
C) Substitution Effect

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Market Demand

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Individual Demand
Julias
Demand
For Italian
Quantit
Price
Dinnersy
15

10

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Individual Demand
Martins
Demand
For Italian
Quantit
Price
Dinnersy
15

10

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Multiple Individuals Demand

Martins

Julias

Julias

15

10

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Julia &
Martins
Martins

P Q Q
15 3

10 6

5 9

37

Multiple Individuals Demand

Julia &
Martins

Savannahs

Kadeems

15

10

Price

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Price

Quantity

15
10
5

3
6
9

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The Market Demand Curve is Individual

Demand Curves Added Together

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Market Demand
Definition: The overall or total
demand for a good, service, or
resource. It represents the
summation of individual
demand curves, whether they
represent individuals,
communities, states, or
nations.
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Market Demand

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Change in Demand

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What happens
on the demand
curve when the
price drops from
$5 to $3?
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Change in Quantity
Demanded

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Law of Demand
Definition: A principle in
economics which states that as
the price of a good, service, or
resource rises, the quantity
demanded will decrease, and
vice versa, all else held
constant.
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Change in
Demand
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Increase in Demand

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Decrease in Demand

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Increase in Quantity Demanded

vs. Increase in Demand
Increase in Quantity
Demanded

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Increase in Demand

52

Decrease in Quantity Demanded

vs. Decrease in Demand
Decrease in Quantity
Demanded

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Decrease in Demand

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Discussion Question
Suppose you are watching the nightly
news and you hear a reporter say this:
In the wake of the recent hurricane,
gas prices increased by almost 50
cents per gallon, and consumers have
responded by significantly decreasing
their demand for gas. Is the news
reporter using the word demand the
same way an economist would?
Explain.
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Discussion Question
In this topic, you have learned about a
variety of factors that we normally
think of as demand shifters. Can you
name other factors that might affect
the demand for specific goods?

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Determinants of Demand Income

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How Income Determines

Demand

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1)
Normal
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1) Normal Good
Definition: A good
for which there is a
direct relationship
between the
demand for the good
and income.
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Normal Good

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Normal Good

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2) Inferior Good
Definition: A good for
which there is an
inverse relationship
between the demand
for the good and
income.
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Inferior Good

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Normal Good

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Quiz Question
An increase in Ashleys income has
caused the change in the graph
below. The good depicted must be:
A) Normal
B) Inferior

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Quiz Question
A decrease in Ashleys income has
caused the change in the graph
below. The good depicted must be:
A) Normal
B) Inferior

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Discussion Question
Think about the goods and services
you buy on a regular basis. Now think
back to a time when your income was
significantly higher or lower than it is
now. Were there things you bought
then that you dont now? Or things you
buy now that you didnt buy back
then? Use your answers to these
questions to find a few goods that are
normal and inferior to you.
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Determinants of Demand Tastes and Preferences, Number

of Buyers, and Expectations

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Tastes and Preferences

Increased preference for the good or service

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Number of Buyers
Increase in the number of buyers

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Expectations

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Expectations: Income
What do you do if you fear
the economy is going to crash
in the near future and you
may lose your job?

Save

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Expectations:
Availability

What do you do if you fear a

good you desire will not be
available in the future?

Buy
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Expectations: Future
Prices

What do you do if you fear

the price is going to go up in
the future?

Buy
Now!

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Discussion Question
Everyone has a different willingness to pay
for a specific good or service, based on their
income, preferences, and specific needs for
the product in question. Think about the
goods you buy and how much youre willing
to pay for them. Are there any goods for
which the amount you would be willing to pay
is much greater than the market price you
actually pay? Are there any goods most
people buy that you dont purchase at all,
because your willingness to pay is below the
market price? Explain.
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Determinants of Demand Substitutes and Complements

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Related Goods
Substitutes
Complements

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Substitutes
Definition: Goods,
services, or resources
that are viewed as
replacements for one
another.
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What do you think will

happen?
If bus prices rise,

the demand for

the subway will

rise!
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Increase in Demand:
Substitutes

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Complements
Definition: Goods,
services, or resources
that are used or
consumed with one
another.
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What do you think will

happen?
If dorm prices rise,

the demand for

college classes
will

decrease!

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Increase in Demand:
Complements

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Quiz Question
An increase in the price of dinners at
fancy restaurants would likely cause
the demand for babysitters to
__________. This is because fancy
dinners and babysitting services are
likely _____________.
A) increase; substitutes
B) increase; complements
C) decrease; substitutes
D) decrease; complements
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Discussion Question
Excluding the examples in the videos
and other learning resources youve
already seen, name two pairs of goods
that are substitutes to you. Name two
pairs of goods that are complements
to you. To what degree does your
purchase of one depend on the other?
That is to say, would you buy each of
them individually even if you had none
of the other good? Explain.
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