choose the quantity they want to buy based on the price, and will buy a good if
MU>MC
MU is utility expected from purchased item
MC is other goods that could be purchased with the money price (or other costs of buying)
If the buyer’s MU is greater than the price (or the marginal opportunity cost of the price), then the buyer is willing to buy the item, otherwise the buyer will not.
At most, the price must be a little below the MU for the buyer to be willing to buy.
quantity demanded is the amount buyers are able and willing to buy at a particular price
We observe that, ceteris paribus, at a higher price, the quantity demanded by buyers is smaller than it is at a lower price. This rule or law concerning price and quantity demanded is called the LAW OF DEMAND.
Another way of stating the law of demand is to say that "the relationship between the price of a good and the quantity demanded of the good is a negative, inverse relationship, ceteris paribus."
Why we believe the Law of Demand is true
income effect-the higher the price, the less you can afford
substitution effect- at a higher price, the benefit of looking into substitutes (other things to buy) is increased
law of diminishing marginal utility (returns)
To a buyer, the MU goes down for an item as the quantity consumed or purchased goes up. Since the MC to the buyer is the price, the price has to go down as the quantity (consumed or purchased) goes up to make the purchase worthwhile to the buyer.
The relationship between the price of a good and the quantity demanded of the good (ceteris paribus) is called DEMAND.
AN IMPORTANT DISTINCTION:
DEMAND is a relationship (not just a number or amount);
QUANTITY DEMANDED is the amount buyers want
Three Ways to Depict Demand (an example)
1. TABLE OF NUMBERS:
| Price |
Quantity Demanded
|
| 0 |
100
|
| 1 |
90
|
| 2 |
80
|
| 3 |
70
|
| 4 |
60
|
| 5 |
50
|
| 6 |
40
|
| 7 |
30
|
| 8 |
20
|
| 9 |
10
|
| 10 |
0
|
2. ALGEBRA FORMULA:
Demand:
Q=100-10P
3. GRAPH:
Demand Curve:
In all of these cases, the quantity demanded changes if the price changes, but demand does not change if price changes, because the table, formula or graph does not change when price changes (price changes are "built in"). When price changes, we simply look at a different part on the table, or insert different numbers in the formula, or look at a different part of the demand curve. The result is a different quantity demanded for different prices, but DEMAND is not a number, it is how all of the price numbers interact with the quantity demanded numbers. That interaction is the same, even if price changes.
CHANGES IN DEMAND
Even though a change in price alone will not change DEMAND, it is possible for demand to change. However, a change in demand means we put different quantity demanded numbers on the table for each price, or write a different algebra formula, or make a new demand curve graph.
For example, if the quantity demanded numbers are bigger for every price than they used to be, we might get the following ways of viewing demand:
Three Ways to Depict a Change in Demand (an example)
1. TABLE OF NUMBERS:
| Price |
Original
Quantity Demanded |
New
Quantity Demanded |
| 0 |
|
130
|
| 1 |
|
120
|
| 2 |
|
110
|
| 3 |
|
100
|
| 4 |
|
90
|
| 5 |
|
80
|
| 6 |
|
70
|
| 7 |
|
60
|
| 8 |
|
50
|
| 9 |
|
40
|
| 10 |
|
30
|
2. ALGEBRA FORMULA:
Demand:
Original: Q=100-10P
New: Q=130-10P
3. GRAPH:
Demand Curve:
Notice that these changes in demand mean that now there is a new, larger quantity demanded at each price. This is necessary if we are to say that "demand has increased." There is a new relationship between price and quantity demanded. The old relationship (and numbers) are no longer in effect.
Demand can increase (moving the demand curve to the right) if
- incomes of buyers are increased (normally, although this is not true for "inferior goods")
- substitutes become more expensive or less available
- complements become less expensive or more available
- number of consumers increases (due to population, demographics)
- fads, fashions, tastes and attitudes (emotion) make the good more popular
- information about the good (including advertising) increases desire for the good
- changes in the buyers' environment (weather, time of year, laws) makes the good more desirable to buyers
- buyers have an expectation of higher FUTURE price for the good
The opposites of these will reduce demand (move the curve to the left)
A change in the price of a good will not change demand for that good; if the price changes, quantity demanded will change. One of the things listed in green above is necessary for demand to change.
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