You are a consumer: you buy food, shoes, clothes, services, textbooks, coffee, ect. In microeconomics, we care a lot about what you buy and what prices you buy things at.
Microeconomics wants to know how much of a product consumers will buy at different prices. For example, let's say Chad has a few pairs of white sneakers. Chad has a pair of Conserves for the gym, a pair of Air Force 1s that he likes to keep clean, and some white Adidas he wears to the bars and gets dirty.
If all white sneakers were $10 dollars, how many pairs of shoes would Chad buy? My guess is Chad would not mind buying 5 pairs. If white sneakers were $150 per pair he would probably not buy more than 2 pairs. If white sneakers were $200 he would only buy a pair.
There is clearly a relationship between the price of white sneakers and how many Chad buys.
We can create a Demand Schedule which shows the relationship between the price and the quantity demanded.
|Price of White Sneakers ($)||Quantity Demanded|
Quantity Demanded is the amount of a good or service that a consumer is willing to purchase at a given price.
QUANTITY DEMANDED IS NOT THE SAME AS DEMAND. This is a huge mistake people make in this course. What's the difference?
Demand is the relationship between price and quantity demanded and is usually shown as a line of a graph. Quantity demanded is a single point on that line.
We are now going to graph this out. You’re going to see A LOT of graphs in this course so make sure you understand what each one is showing.
On our Y-axis is price. This price is the price of one unit of the good or service. In this case the Y-axis would show the different prices that a pair of white sneakers could cost.
On our X-axis is Quantity Demanded. This is the different quantities of white sneakers Chad could potentially want.
Using our Demand Schedule lets plot each point.
If a pair of white sneakers cost $10, Chad will want 5 pairs. This point is plotted as a red dot below.
If a pair of white sneakers cost $150, Chad will want 2 pairs. This point is plotted as a red dot below.
If a pair of white sneakers cost $200, Chad will want 1 pair. This point is plotted as a red dot below.
With these points plotted we see that as the price of white sneakers falls, the Quantity Demanded increases. We can show the relationship between the price of the product and the Quantity Demanded using a Demand Curve. The demand curve is shown below as a red line.
Notice how the Demand curve is downward sloping.
This entire example shows a very key economic concept.
The Law of Demand states that holding everything constant, when the price of a product falls, the quantity demanded increases.
Changes in Quantity Demanded
Remember that Quantity Demanded and Demand are different things. You will have questions on your exam that give you a scenario, and you have to know whether it affects Demand or Quantity Demanded.
Holding all else constant, quantity demanded is ONLY changed by the price of a product.
Using our example from above, let’s say that the price of white sneakers is $200. Now, the seller of the shoes has decreased the price of shoes to $10 dollars. What happens to the quantity demanded?
We know that at a price of $200, Chad wants 1 pair of shoes. We also know that at a price of $10, Chad wants 5 pairs of shoes. Therefore, Quantity Demanded increases by 4. We can also use the graph to solve this.
Changes in Demand
A change in demand refers to the demand curve shifting left or right due to a change in the relationship between the price of a product and the quantity demanded.
There are several factors that change demand. You will have to memorize and understand these in order to do well on the test.
What changes demand:
- Expected future prices
- Prices of related goods
- Consumer tastes
- Number of buyers
Expected future prices
If the price of white sneakers is $10 this year but Chad expects the price to increase in the future, he is going to stock up on sneakers while the price is low. If everyone expects the price to go up in the future, they will do the same which increases demand.
If the price of white sneakers is $200 and everyone expects the price to go down in the future, they will wait to buy white sneakers until next year which lowers demand and shifts it to the left.
If Chad's income were to increase significantly, he would be willing to buy more white sneakers at any given price. This would cause the demand curve to shift to the right.
If Chad’s income were to decrease significantly, he would be willing to buy less white sneakers at any given price shifting the demand curve to the left. Both these scenarios are shown below.
Prices of related goods
Chad is shopping for white sneakers when he finds out that all black sneakers are on sale for a fraction of the price of white sneakers. White sneakers and black sneakers are essentially the same thing so he decides to buy the black sneakers.
This would lower the demand for white sneakers and shift the demand curve to the left. Why?
Black sneakers would be considered a substitute for white sneakers.
A substitute good is a product or service that consumers see as essentially the same or similar-enough to another product.
If the price of a substitute good decreases (black sneakers on sale), the demand for white sneakers decreases because people would rather buy the black sneakers.
If the price of a substitute good increases (black sneakers are more expensive), the demand for white sneakers increases because everyone who is buying black sneakers will switch to the white sneaker market.
Many products are not consumed alone. For example, when you buy chips you also need to buy salsa, when you buy a hotdog you also have to buy a bun, when you buy a car you also have to buy gas.
These are all examples of complementary goods.
A complementary good is a product used in combination with another product. When paired together both goods have more value.
The price of one complementary good affects the demand for the other good. For example, if the price of hotdogs increased, people would buy less hotdogs which in turn means they would buy less buns. This lowers the demand for buns.
If the price of hotdogs decreased people would buy more hotdogs which in turn means they would buy more buns. In this scenario, a decrease in the price of a complementary good increases the demand for buns.
Consumer tastes also affect the demand for a good. If every single one of the the Kardashians only wore white sneakers, white sneakers would in style and demand would increase. This would cause the demand curve to shift to the right.
If all the Kardashians said white sneakers were out of style, consumers would think the same and demand would decrease.
Number of buyers
If the population increases, then there are more people demanding goods and services. This increases demand and shifts the demand curve to the right.
If the population decreases, then there are less people demanding goods and services. This causes demand to decrease and shift the demand curve to the left.
Next up, let's learn about supply!
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|Apply||PRACTICE PROBLEM BANK (PREVIEW ONLY)|
|Concept||Production Possibility Frontier (PPF)|
|Concept||Supply (PREVIEW ONLY)|
|Concept||Equilibrium (PREVIEW ONLY)|
|Concept||Absolute vs. Comparative Advantage (PREVIEW ONLY)|