DEMAND

Demand
The desire, ability, and willingness to
buy a product

Knowledge of demand is important

for business planning
Individual Demand Schedule And
Curve
 The Law of Demand

Quantity demanded of goods and

service varies INVERSELY with its
price
Market Demand Curve
 Utility
The amount of usefulness or
satisfaction a person gets from
acquiring or using a product
 Marginal Utility
The extra usefulness or satisfaction a
person gets from acquiring or using
one more unit of a product
Diminishing Marginal Utility
The extra satisfaction we get from
using additional quantities of the
product begins to diminish

- We are not willing to pay as much for

the second, third, fourth, and so on.
- This is why the demand curve is
down ward sloping
Factors that Change
Quantity Demanded

The movement is ONLY along the

demand curve
 1. The Income Effect
The change in quantity demanded
because of a change in price that
changes consumers real income

$15 per CD 6 CDs $90

If the price drop

$10 per CD6 CDs$60

They have extra $30 to spend, so they
buy more
2. The Substitution Effect
Lower Price CDs will be relatively
less expensive than other goods

They will replace more costly item

with cheaper item (watching concert
and movies are replaced by buying
CDs)
 Change In Demand
A change in demand cause the
demand curve to SHIFT

To the left decrease in demand

To the right increase in demand
Resulting in an entirely a new curve
 Factors that Change
Demand
1. Consumer Income
2. Consumer Tastes
3. Substitutes
4. Complements
5. Change in Expectation
6. Number of Consumers
1. Consumer Income
With bigger income, consumers
can afford to buy more goods
and services
The curve will shift to
_____________

With smaller income,

consumers will buy less goods
and services
The curve will shift to
______________
The quantity increases at each and every
price
 2. Consumer Tastes
They would buy more/less of it at
each and every price, if their taste
has changed
 3. Substitutes
Substitutes: a good that can
be used in place of other
products

Example: butter and margarine

The demand of butter will

increase if the price of
margarine increase
 4. Complements
Related goods
The use of one increases the
use of others
Example: Computer and
software

If the price of computer goes

up, less people will buy
computer and less software
Gillette Strategy-Keeping The Handle
Cheap
 5. Change in Expectations
Expectations=the way people think
about the future

Example: holding to buy iphone 6,

and waiting for iphone 7
Example: Stocking some food
because of the expectation of bad
harvest
 6. Number of Consumers
Larry and Curly still buy
CDs, but their friend, Moe
start buying from itunes.
It will not change
individual demand curve
It will change market
demand curve
Whenever anyone leaves
market decline in market
demand
Elasticity of Demand
 Elasticity

An example of Economic Cause

and Effect

A measure of responsiveness
that tells us how a dependent
variable such as quantity,
responds to a change in an
independent variable such as
price
 Demand Elasticity
The extent to which a change in price
causes a change in quantity
demanded
 Demand Elasticity
Change in price will cause a:

Relatively larger

Relatively smaller

Or proportional change

in quantity demanded
 Elastic Demand
Demand is elastic when a change in
price causes a relatively larger
change in quantity demanded
 Demand Elasticity
Price of tomatoes
decline from $3 to $2
(33.3% decrease)

Quantity demanded
increase from 2 to 4
units (100% increase)
 Demand Elasticity
Often happen to products like: beans,
corn, tomatoes, or other fresh
vegetables.

When the price is high, consumer

usually buy canned vegies
 Inelastic Demand
A change of price causes a relatively
smaller change in the quantity demanded

Price drop from $3 to $2

(33.3% decrease)

Quantity demanded increases from 2 to 2.5

units
(25% increase)

Example: Table salt

 Unit Elastic Demand
When the percent change in price is
almost the same (roughly even) as
the percent change in quantity
demanded

5% drop of price
5% increase of quantity
 The Total Expenditures Test
To estimate elasticity, it is useful to
look at the impact of a price change
on total expenditures
 Figure 4.5--p.103
Using Expenditure Test to measure
Demand Elasticity
Why Is Measuring Elasticity
Important?
For a product with elastic
demand
PRICE Consumer
Expenditures

WHICH CAN
AFFECT
PROFIT

PRICE Consumer
Expenditures
 Three Factors That Affect
Demand Elasticity
1. Can the purchase be delayed?
No! Medicine inelastic
YES! Mobile phones elastic

2. Are there enough substitutes?

FEW inelastic
ENOUGH elastic
 Three Factors That Affect
Demand Elasticity
3. Does the purchase use a large
portion of income?

NO! inelastic
YES! elastic
SUPPLY
 Definition
The amount of a product that would
be offered for sale at all possible
prices that could prevail in the
market
 Law of Supply
Supplier will offer more for sale at
high prices and less at lower prices

If the price supply

If the price supply

Supply Schedule and Supply
Curve
Supply Curve

Supply curve has a

positive slope
Individual and Market Supply Curve
(p.115)
 Quantity Supplied
Is the amount that producers bring to
market at any given price

Change in quantity supplied the

change in amount offered for sale in
response to a change in a price
Change in Quantity Supplied
Change in quantity supplied the
change in amount offered for sale in
response to a change in a price

Resulting in the movement along the

supply curve (figure 5.1)
 Change in Supply
A situation where suppliers offer
different amounts of products for sale
at all possible prices in the market

Increase in supply the curve shifts to

the right
Decrease in supply the curve shifts to
the left
 Factors Affecting A Change in
Supply
1. Cost of input
2. Productivity
3. Technology
4. Taxes and subsidies
5. Expectation
6. Government Regulation
7. Number of sellers
 1. Cost of Inputs
Inputs for supplier can be:
Labor, packaging price, material price

If input price decrease:

-the cost to produce is lower
-supplier can get more profit
-supply increases
 1. Cost of Inputs
Inputs for supplier can be:
Labor, packaging price, material price

If input price decreases:

-the cost to produce is lower
-supplier can get more profit
-supply increases
-the curve shift to the right
 1. Cost of Inputs

If input price increases:

-the cost to produce is _____
-supplier can get _______ profit
-supply ________
-the curve shift to the _______
2. Productivity
If productivity is high:
- Supplier can
produce more
product
- More CDs are
produced at every
price
- Supply curve shifts
to the right
 2. Productivity
If productivity is low:
- Suppliers produce ________ product
- Supply curve shifts to the ______
 3.
Technology
- New technology tends to increase
productivity
- Lowering production cost
- Supply curve will shift to the right

Exception can happen

if technology break down.
Moving the curve to the left
 4. Taxes and
Subsidy
Taxes is viewed as cost
If taxes go up supply decreases
If taxes go down supply increases

Subsidy is government payment to

protect economic activity
Subsidy lower the cost of production
 5. Expectation
If the producers think
the price will increase
in the future, they will
hold the product

If the producers think

the price will decrease
in the future, they will
sell the product
 6. Government Regulation
Tighter government
regulation
restricts supply
shifting to the left

Relaxed government
regulation lower
cost of production
shifting to the right
 7. Number of Sellers
As more firms enter the industry
the curve shifts to the right
Fewer firms in the industry fewer
products offered in the market
shift to the left
 Price Equilibrium
Price where quantity supplied equals
quantity demanded
Supply Elasticity
 Supply Elasticity
Remember Elasticity

A measure of the way in which

quantity supplied responds to a
change in price
 Supply Elasticity
Elastic supply Small increase in
price large increase of output

Elasticity
*quantity purchased demand
elasticity
*quantity brought to the market for
sale supply elasticity
 Three Elasticities
Figure 5.4 (page 119)
 Determinants of Supply
Elasticity
Depend on the nature of its
production
If a firm can adjust to new prices
quickly elastic supply, e.g: candy
factory, kites
If the nature take longer time to
adjust inelastic, e.g: oil company
(need large capital, technology, etc)