Macro: Demand
Three Reasons Demand Slopes Down
1. Income Effect 2. Diminishing Marginal Utility 3. Substitution Effect
Related Goods
1. substitutes 2. complements
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?
10 gallons (20/2=10)
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?
5 gallons [10 / 2 = 5]; -Notice that as the price increased, our quantity demanded decreased (from 10 gallons in the first question to 5 gallons in this question) because we had less purchasing power.
Normal Good
A good for which there is a direct relationship between the demand for the good and income
Inferior Good
A good for which there is an inverse relationship between the demand for the good and income -For an inferior good, as income increases demand will fall. -Likewise, as income decreases, demand for inferior goods will rise.
The Law of Demand
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
Market
Any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources
Number of Buyers
Buyers are market participants who seek to obtain goods, service, and resources. The number of buyers in a market will determine demand levels. An increase in the number of buyers for an item will increase its demand. A decrease in the number of buyers for an item will decrease its demand. Recent Example: Demand for oil has increased recently, as the number of buyers in developing countries like India and China has increased.
How Income Determines Demand
Demand curves reflect the willingness and ability to buy a good, service, or resource, all else held constant. Income is one of the variables that is held constant, so if income changes, consumers' willingness and ability to buy a good, service, or resource changes as well, resulting in a new demand relationship. When consumers have more or less to spend, the demand curve shifts.
Expectations
Expectations are the anticipation by individuals and firms of costs and benefits that lie in the future. This one is a little trickier to understand. If we expect changes in things like income, availability, and future prices, that can have an impact on our current demand.
Determinants of Demand
Factors other than price that determine the quantities demanded of a good or service 1. taste and preferences 2. number of buyers 3. expectation
Complements
Goods, services, or resources that are used or consumed with one another Ex: : Peanut butter and jelly, chips and guacamole, chicken wings and ranch dressing, smartphones and apps, boats and water skis.
Substitutes
Goods, services, or resources that are viewed as replacements for one another.
Tastes and Preferences
If consumers' taste or preference for a good or service changes, so too will its demand. The greater the preference for an item, the further out its demand curve will shift. If it becomes more popular the demand will increase. If it becomes less popular the demand will decrease. Recent Example: Kale has become popular as a super food. Thus, the demand for kale has shifted to the right.
What do you do if you fear the price is going to go up in the future?
If you expect that the price of your favorite cereal is going to increase in the near future, you may buy a lot and stock up now before the prices increase. BUY NOW
What do you do if you fear the economy is going to crash in the near future and you may lose your job?
If your expectations are that your income could drastically fall in the future, then your current demand for normal goods will decrease. START SAVING MONEY
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.
Income Effect
Demand Curve
On this slide we can see the basic shape of a demand curve. There is a negative relationship between the price of an item and the quantity demanded. (Demand curves are Downward-sloping)
Example of normal/inferior goods
One classic example of an inferior good is rice. As you become wealthier, you switch to eating other foods, like steaks. Further Examples: College students frequently consume more mac & cheese or ramen noodles (other examples of inferior goods), but once their income goes up after securing a great job out of college their demand for these goods decreases.
Who sets prices? (if buyers and seller don't)
One famous analogy in economics is that prices are like scissors. You can ask the question: Who sets the price? Is it the buyer or the seller? A parallel question you can ask is which blade of the scissors cuts the paper? Is it the top blade or the bottom blade? The answer in both cases is that it takes both. In economics it takes both buyers and sellers to set prices, and with scissors it takes a top and bottom blade to cut the paper. Prices and quantities traded are determined by the interaction of buyers and sellers in a market.
What do you do if you fear a good you desire will not be available in the future?
People may fear that their government is going to ban, or perhaps tax, an item they like to consume. They may rush out to consume more now before the price increases or the item is not available. Another example is a limited edition good, which is no longer available for sale after the initial run sells out. Consumers will rush to buy the good before it's too late. BUY NOW
How Trade Happens in a Market
Prices and quantities traded are determined by the interaction of buyers and sellers in a market. If the price of oranges is too high, the buyer will not purchase them. If the price of oranges is too low, it will not be worth it for the seller to sell them.
How does supply and demand effect with prices?
Prices are driven by both the buyer's demand for the good or service and the producer's willingness to supply the good or service.
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.
Substitution Effect
Income Effect
The effect that a change in the price of a good, service, or resource has on the purchasing power of income -As a price of a good goes down, the money that you have gains purchasing power - you can buy more stuff with the same amount of money. -The opposite is of course also true. If a price goes up, the money you have loses purchasing power.
Substitution Effect
The effect that a change in the price of one good, service, or resource has on the demand for another
Diminishing Marginal Utility
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.
Market Demand
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
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 _____________.
decrease; complements -Parents who hire babysitters are likely to go out on dates to places such as fancy restaurants. These two goods have a direct, or complementary, relationship. Thus, an increase in the price of one will decrease the demand for the other.
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.
diminishing Marginal Utility
Law of Demand
states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant
What do you think will happen if dorm prices rise?
the demand for college classes to diminish
What do you think will happen if bus prices rises?
the demand for the subways will rise
