Chapter 2: Demand: Thinking like a buyer

Expectations

.Which demand shifter? In the early days of the pandemic, Kelly was afraid of a future toilet paper shortage so she bought 2 extra cases at the store.

#4: expectations If the price of an Apple watch is expected to fall in a month... ⇒ Decreases demand for Apple watches today.

Ex: If the price of an Apple watch is expected to fall in a month... Which shift demand?

marginal benefit(bang)/price(buck)

bang for your buck=

individual:The quantity one person demands, at each price market: The total quantity demanded by the market, at each price

Indvidual demand vs market demand

intensive margin -existing customers use this product more intensively

the cheaper something is, the more each customer buys (buy it more intensively)

Law of demand

the quantity demanded is increasing when prices are lower

income

Which demand shifter? After getting a raise, Amir decides go out to dinner twice as often each week.

Ex#2: Instead of buying an uber right after a concert is over, hang out with your friends first and then go home when prices are normal =your (expectations) about a lower price later leads to a decline your demand fir Uber's

*lower price of a substitute=lower demand b/c you would buy that other substitute I(cheaper option)

Ex#2: Instead of buying an uber right after a concert is over, hang out with your friends first and then go home when prices are normal =your (expectations) about a lower price later leads to a decline your demand for Uber's

*lower price of a substitute=lower demand b/c you would buy that other substitute I(cheaper option)

1) downward sloping 2) the lower the price, the increase in quantity demander (the cheaper something is, the more you buy)

1)Demand curves are.... 2)the lower the price, the ______quantity demanded

1)survey your customers (understand indvidual demand first) -ask them about the quantity they demand at each price 2) Add up the total quantity demanded -yielding the total quantity demanded at each price 3) Scale the quantities demanded by the survey respondents so that they represent the whole market -multiply survey demanded: size of market/size of survey Ex: 300 million Americans/500 survey respondents=600,000(use this to multiply) sum of demand across 500 pplx 600,000 (represents entire market) 4) Ploy the market demand curve -the quantity demanded by the market at each price

4 steps to estimate market demand:

1. income 2. tastes 3. prices of other goods 4. expectations 5. network and congestion effects =these shift indvidual demand curves, which shift market demand curves 6. the number and type of buyer (only shifts market demand) -changes the scaling factor in moving from individual to market demand PEPTIC****

6 factors shifting market demand curves

1. This is a "how many" question →Apply the marginal principle (should I buy one more gallon of gas?) 2. Use the cost‐benefit principle. →buy one more gallon if: the marginal benefit is at least large as the marginal cost (the benefit of one more gallon of gas>the cost of one more gallon) 3. Assessing the marginal benefit: Apply the opportunity cost principle (buy this gallon of gas "or what?") - How much better is life, relative to the next best alternative? - Quantify this marginal benefit by assessing your willingness to payDeciding What Quantity to Buy

Deciding what quantity to buy: How much gas should I buy? (at a given price)

decreases Ex: price of airpods decrease, demand of iphone increase

Demand _______ when the price of complementary goods rises

One or two scoops are scrumptious. A third scoop still tastes pretty good. By the fourth, you're getting tired of all that sugar. And a fifth scoop will make you feel sick. (Believe me.) As you eat more ice cream, the marginal benefit of another scoop keeps getting smaller. Take Darren's demand for gas. He planned to use his first gallon of gas for his high marginal benefit activities (shopping), his second gallon would go to a slightly lower benefit activity (driving to work), and each successive gallon is used for a lower priority trip. As a result, each extra gallon yields a successively lower marginal benefit.

Diminishing marginal benefit examples

Ex: if price of gas falls: 1) substitution effect - The bang‐for‐your‐buck of gas rises(relative to the next best alternative). -purchase more gas (Keep purchasing until bang‐for‐your buck of gas is equal to that of food) AKA price goes down, buy something else instead 2) Income effect -Your purchasing power rises: You can afford more gas and more food. -Normal good vs.inferior good

Factors that affect the shape of the demand curve:

Substitute good

Goods that go together (e.g., iPhones and Bluetooth headphones)

1. increase in income shifts demand curves for inferior goods to the left Ex: when I have more income.. =i take fewer buses (inferior good) =shifts demand curve tio the left

Higher income decreases demand for inferior goods

1. increase in income shifts the demand curves for normal goods to the right Ex: When i have more income =i take more taxis (normal good) =shifts the demand curve to the right

Higher income increases demand for normal goods:

#shifter 5: Other people's buying decisions

Network vs congestion effects

Buy more of an item if its marginal benefit is greater than (or equal to) the price. (If it's equal, it's no big deal.You're neither better nor worse off.As a convention, let's just buy it.) Keep buying until: Price = Marginal benefit(This is the rational rule, applied to buyers.) -Following this rule will maximize your economic surplus - It leads you to take every chance to increase your surplus -The theory of demand is the theory of marginal benefits.

Rational rule for buyers: -The theory of demand is ______

Substitute good

Replace each other (e.g., iPhones and Android phones

1)*if individual demand curve don't shift following price change, neither will market demand curve 2)****Market demand curves shows the sets of plans for consumers =how they react to different prices 3) **IF $CHANGES, PLAN DOESN"T CHANGE=DEMAND CURVE DOESN"T CHANGE Ex: if pho goes from, $10-$11, doesn't change plans, changes quantity demand 4)If the change buyer's plans they lead to a new damnd curve AKA a shift in demand curve=change in plans =CALL THIS AN INC IN DEMAND (buy more) or a DECREASE IN DEMAND (buy less) **Reminders: lower price=increase in quantity demanded (law of demand) -demand increases (shifts right) -demand decreases (shifts left)

Shifts vs.movements along the demand curve

Simple: demand is all about marginal benefits If ppl follow the Rational Rule for Buyers...then... price=marginal benefit... then... your indvidual demand curve is your marginal benefit curve Complicated: Your buying choices reflect a trade off between goods Ex: you face a tradeoff between buying gas and other goods (food) - bang for your buck=marginal benefit(bang)/price(buck) TO MAKE THE BEST CHOICE: Rational tradeoff rule: Keep buying more gas as long as **Bang‐for‐your‐buck of gas ≥ Bang‐for‐your‐buck of food (and other goods, too)***

So, what determines the shape of demand curves?

Shifter #3: Price of other goods Complementary demand ↓↓ when price of complementary good ↑↑, demand ↑↑ when price of complementary good ↓↓ Substitute: demand ↑↑ when price of substitutes ↑↑, demand ↓↓ when price of substitutes ↓↓

Substitute goods vs. Complementary goods Ex: When the price of taxis fall =I take the bus less (substitute for taxis) =I go out with my friends more (complement for taxis)

preferences

Which demand shifter? Marco became vegan last year, so he doesn't buy any meat or cheese anymore.

Extensive market -extend market

The cheaper something is, the more quantity you get. (Ex: if the $ of coffee is low enough, tea drinkers will buy coffee instead) -brings people into the market

Shifter #6: Type and Number of buyers **Market demand is the SUM of individual demand =each factor that shifts individual demand shifts market demand***

The individuals in the market are changing -doesn't shift individual demand -shifts market demand -more buyers=increases demand Ex: Baby boom in WWII=increase in demand for baby clothes=increase demand for colleges=increase demand for suits=increase demand for retirement homes

quantity demanded is higher when prices are lower. Law of Demand

The quantity demanded is ______when prices are ______. This is the Law________

Network and congestion

Which demand shifter? Alexia used to use ZipCar all the time, but now she can rarely find an available vehicle when she needs one.

Subsidize complements to hard work. -Coffee -On‐site medical care -Childcare Don't provide substitutes for hard work - Magazines to read -Access to Facebook -TV watching areas

Use sub/comp... if you want your workers to work hard...

V:Costs that vary with the amount of output (wages, oil expenditures) F:Costs that stay the same regardless of output (managers, buildings).....don't change when you produce another unit → irrelevant to the "or what?" question

Variable vs fixed costs

1. intensive margin 2. extensive margin

What 2 things does the law of demand reflect?

1) An individual demand curve is just a set of plans (The quantity you plan to buy, depending on the price.) 2) It is a set of plans "holding other things constant" -if other things change=demand curve will change Ex: if considering demand for housing, the demand curve will indicate willingness to pay, relative to price Ex:what might change your plans for how many cups of coffee to buy? -taste of coffee changes -change in income -more exams -connivence of coffee shops -health=need less coffee

What Is an Individual Demand Curve?

quantity people plan to buy, depending on the price -set of plans that "hold other things constant" bc... if other things chabge... the market demand curve will shift

What is a market demand curve?

Congestion effects:

When a good becomes less useful because other people use it **less valuable when other people use them** Increased use by others will decrease demand Ex: I don't drive to the game because traffic is terrible. -roads -prom dresses

Network effects

When a good becomes more useful because other people use it. ****Are more valuable when other people use them *Increased use by others will increase demand.* Ex: I use WhatsApp because everyone else uses WhatsApp. -Microsoft Word -Speaking English rather than Portuguese - Buying an SUV Ex: 1 person storming Area 51 vs 10000 ppl storming there (protest movements)

Demand increases when the price of substitute goods rises.

When demand ______ the price of a substitution good ______

A) shifts the demand curve to the left b)decreasing the quantity at each and every price. c) decreasing the price buyers are willing to pay for any given quantity

When there is a decrease in demand..

A) shifts the demand curve to the right b)it increases the quantity at each and every price. c) which increases the price buyers are willing to pay for any given quantity

When there is a increase in demand...

#2:changes in preferences/tastes shift demand

Which market demand shifter? -The pandemic decreased demand for services and increased demand for goods -Increased environmental awareness has reduced demand for large SUVs. -Changes in fashion trends shift demand for clothing choices.

#4: Expectations -Buying tomorrow is a substitutefor buying today.

Which market shifter? Interdependence principle: Your choices are linked through time -buying tomorrow is a ________ for buying today

Shifter #1: Income -Normal goods vs. inferior goods Ex: When my income is higher, I take more taxis and fewer buses

Which market shifter? Normal good: higher income cause an increase in demand for normal goods =Most goods are normal goods When you have more money, you buy more of them Inferior: higher income causes a decrease in demand for inferior goods =inferior goods are those you "make do" with because of constrained income.

D: Change in price(inc) leads to (decrease in quantity demanded) b/c you still have to buy gas!!! just changes how much gas you buy

Which of these headlines is invalid, given our understanding of movements along the demand curve vs. shifts of the demand curve? A. "Aging Baby Boomers expected to dramatically increase demand for in‐home care by 2030" B. "By investing in charging infrastructure, Biden administration hopes to increase demand for EV vehicles" C. "Share prices tumble for Boston Beer Co., owner of 'Truly', due to decreased demand in a crowded hard seltzer market" D. "Soaring gas prices nationwide expected to cause sharp decrease in demand over the holiday weekend" E. "Pandemic 'stress‐baking' spurs increased demand for flour, yeast, and sugar"

Downward‐sloping demand means: -Price declines with quantity If the price you're willing to pay is your marginal benefit -implies: marginal benefits are declining with quantity =DEMAND CURVES SLOPE DOWN BC ***diminishing marginal benefit** (each additional item yields a smaller marginl benefit than the previous item)

Why do demand curves slope downward?

individual demand curve=marginal benefit curve If you want to know your customer's marginal benefits, you can infer it from their demand curve.

Your individual demand curve is your marginal _______ curve.

marginal benefit curve

Your individual demand curve=

Diminishing marginal benefit

each additional item yields a smaller marginal benefit than the previous item

price on vertical quantity on horizontal (p's before q's)

graphing reminders!!! 1._____on the vertical axis _____on the horizontal axis 2> units on both axis 3.quantity refers to a period of time 4.label the curve (indivdual demand curve) 5. demanded curve can be curved or a straight line

Prices of other goods

which demand shifter? Jaime's company cut its corporate travel budget once the mangers realized they could meet virtually using Zoom instead.