In economics the buying side is referred to as demand

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Unformatted text preview: des: a buying side and a selling side. In economics, the buying side is referred to as demand, and the selling side is referred to as supply. In this chapter, you will learn about demand; in the next chapter, you will learn about supply. The word demand has a specific meaning in economics. It refers to the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. Willingness to purchase a good refers to a person’s want or desire for the good. Having the ability to purchase a good means having the money to pay for the good. Both willingness and ability to purchase must be present for demand to exist. It is important for you to remember that if either one of these conditions is absent, there is no demand. Cruz doesn’t have the $34,000 needed to buy a particular car. If she did have the money, though, she says that she certainly would buy the car. Notice that EXAMPLE: Cruz has the willingness (she wants the car), but not the ability (not enough money) to buy the car. Under these circumstances (willingness, but not ability, to buy), Cruz does not have a demand for the car. Molly is shopping for a new cell phone. The one she likes is $129, which is within her price range. She was worried that she wouldn’t have enough money, but she has set aside just enough for the new phone. Because Molly has the willingness and the ability to buy the cell phone, demand does exist. EXAMPLE: What Does the Law of Demand “Say”? Suppose the average price of a compact disc rises from $10 to $15. Will customers want to buy more or fewer compact discs at the higher price? Most people would say that customers would buy fewer CDs. Now suppose the average price of a compact disc falls from $10 to $5. Will customers want to buy more or fewer compact discs at the lower price? Most people would say more. 04 (086-109) EMC Chap 04 11/17/05 4:36 PM Page 91 If you answered the questions the way most people would, you instinctively understand the law of demand. This law says that as the price of a good increases, the quantity demanded of the good decreases. The law of demand also says that as the price of a good decreases, the quantity demanded of the good increases. In other words, price and quantity demanded move in opposite directions. This relationship (you have probably heard it referred to as an inverse relationship in your math classes) can be shown in symbols: Law of Demand If P ↑ then Q d ↓ If P↓ then Q d ↑ (where P price and Q d quantity demanded) If you were reading closely, you probably noticed two words that sound alike: demand and quantity demanded. Don’t make the mistake of thinking they mean the same thing. Demand, as you learned earlier, refers to both the willingness and ability of buyers to purchase a good or service. For example, if an economist said that Karen had a demand for popcorn, you would know that Karen has both the willingness and ability to purchase popcorn. Quantity demanded is a new and different concept. It refers to the number of units of a good purchased at a specific price. For example, suppose the price of popcorn is $5 a bag, and Karen buys two bags. In this case two bags of popcorn is the quantity demanded of popcorn at $5 a bag. As you work your way through this chapter, you will see why it is important to know the difference between demand and quantity demanded. isfaction gained from each “The main reason economists additional unit of the good believe so strongly in the law decreases. For example, you of demand is that it is so may receive more utility plausible, even to (satisfaction) from eating noneconomists.” your first hamburger at — David R. Henderson lunch than your second and, if you continue, more utility from your second hamburger than your third. What does this have to do with the law of demand? Economists state that the more utility you receive from a unit of a good, the quantity demanded higher price you are willing to pay for it; and The number of units of a good purchased at a the less utility you receive from a unit of a specific price. good, the lower price you are willing to pay for it. According to the law of diminishing law of diminishing marginal utility marginal utility, individuals eventually A law stating that as a obtain less utility from additional units of a person consumes addigood (such as hamburgers), so it follows that tional units of a good, they will buy larger quantities of a good only eventually the utility gained from each addiat lower prices. And this is what the law of tional unit of the good decreases. demand states. Why Do Price and Quantity Demanded Move in Opposite Directions? The law of demand says that as price rises, quantity demanded falls, and that as price falls, quantity demanded rises. Why? According to economists, it is because of the law of diminishing marginal utility, which states that as a person consumes additional units of a good, eventually the utility or sat- Harry Potter and the Order of the Phoenix was...
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This document was uploaded on 01/16/2014.

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