Demand

(Lecture Notes)

Demand - the number of units of a good that consumers are willing (and able) to take off the market at various alternative prices, per unit of time, other things constant.

Note:

“per unit of time” - tells us what about demand? What kind of variable is demand?

“other things constant” - indicating that price is not the only thing that determines how much of a good we will buy. There are also “other things”. What are some of these other things?

“at various alternative prices” -And here we are holding these “other things” constant while varying the price of the good and observing how consumers will react.

And how will they react? The law of demand indicates that there is an inverse relationship between the price of a good and the quantity demanded.

This simply means that, other things remaining the same, people will buy more of the good as the price comes down, less as the price goes up.

We generally note that as:

Q _x ^D= f ( P_x, …..

Graphically,

What about the “other things”?

How much of a good that we will take off the market depends not only on price of the good, but also whether we want or like the product or not. Let T (standing for consumer tastes and preferences) denote this variable.

Also, consumer incomes. Let Y stand for consumer incomes. And how do consumer incomes affect the amount of a good that consumers will take off the market?

That depends. If it is a normal good, then there is a positive, or direct, relationship between changes in consumer incomes and the amount that consumers will buy. If, on the other hand, consumers buy less of the good when their incomes rise, and more of the good whenever their incomes fall, ie., there is an inverse relationship between changes in income and the amount consumers will buy, then the good is defined as an “inferior good”.

Name a few goods that you think would be “normal” goods.

Name a few goods that you think would be “inferior” goods.

At this stage, our demand function might be written thus:

Q_x^D = f ( P_x , T, Y …

Some other “other things”

Price of related goods

If the related good is a substitute:

(Denote this P_s )

Is this relationship positive (direct), or inverse (negative) ? To answer, ask yourself this:

“If there are two goods that are good substitutes for me, whenever the price of one rises, do I buy more or less of the other one?”

Review Note: If two variables always change in opposite directions, then they are said to be related how? And how do they graph?

Back to related goods:

Sometimes two goods are not substitutes, they are complements. We use the two goods together. If we buy more of one, then we also buy more of the other. We will denote this: P_c .

In this case, if the price of one of the goods rises, then do we buy more, or less, of the other?

Then the relationship is said to be

(positive, inverse) Which?

Name a few goods that are complementary goods for you.

Our demand function now reads:

Q_x^D = f ( P_x , T, Y, P_s , P_c ….

In general then, we are saying with this equation that the amount of good X that people are willing to buy depends on the price of X…. and some “other things”.

Graphically, how do we illustrate the effects of a change in the price of X ?

That relationship is built into the demand curve. As we move to higher prices, we move leftward along the horizontal axis (toward smaller quantities). As we move to lower prices of X, then we move rightward along the horizontal axis (toward larger quantities).

This is called a change in quantity demanded. Thus price of the good and the quantity demanded are inversely related.

But what if a change occurs in one of the “other things” ? This is not built into the curve. “Other things” is not listed on either axis.

Thus, if one of the “other things” changes, then we must construct an entirely new curve. The new curve will lie either to the right of the old curve (denoting an increase in demand), or to the left (denoting a decrease in demand).

Meaning, an increase in demand is illustrated as a rightward shift of the demand curve.

A decrease in demand is shown as a leftward shift of the demand curve.

Be certain that you know the difference between a change in quantity demanded (how it is shown graphically, and what causes such a change) and a change in demand (and how that is illustrated and what causes it).

For example:

If the price of gasoline falls from $1.39 per gallon to $1.09 per gallon, and people respond by buying more gasoline—is this describing a change in demand, or a change in quantity demanded?

Illustrate!

If the price of gasoline falls from $1.39 per gallon to $1.09 per gallon and people respond by buying bigger cars, then has the demand for big cars increased, or has there been only a change in the quantity (of big cars) demanded?

Illustrate!