Summary

Individual Demand Takeaways

Individual Demand Curve plots quantity a person plans to buy at each price

  • Keep other factors constant (ceteris paribus)

Law of Demand states as prices fall, quantity rises

Your Demand Curve Takeaways

Rational Rule for Buyer: Buy more if MB >= Price

$$\text{Demand Curve}=\text{MB Curve}$$

Diminishing MB: Each extra item ends up in smaller benefit

Market Demand Takeaways

Market Demand Curve: Total quantity demanded by the entire market at each price.

  • Four-step process

If prices of goods change, just move along existing curve

  • This also affects the quantity demanded

Individual Demand

Individual Demand is how much of an item a person would pay at each price.

Individual Demand Curve

A graph that plots the quantity of an item that someone plans to purchase at each price

  • A way to visualize Individual Demand
  • Visually summarizes buying plans and how they vary with price

Let’s say Sam wants to buy $0.40 chocolates. Here is what his Individual Demand Curve could possibly look like:

Price Quantity
$1 1
$1 2
$.75 3
$.50 4
$.25 5

Individual Demand Curve

As shown in the data, the more chocolates Sam consumes, the more “satiated” he becomes (stomach might be full, enough sugar for the day, etc). Due to this, their demand for the item “diminishes” until: $$\text{Marginal Benefit}= \text{Cost}$$

Therefore, Sam should stop buying chocolate after 4 since he will be willing to pay only $0.25 for the 5th chocolate which is worth $0.40.

Ceteris Paribus

This means “Holding other things constant” in Latin

There are many extraneous factors that may affect someone’s demand curve. If Sam lost his job, he may not want to spend as much on chocolate.

Due to this, economists try to remove all other factors and focus on price.

  • After that is resolved, they introduce new factors separately

The Law of Demand

The tendency for quantity to be higher when price is lower

Pretty simple:

  • as prices fall
  • quantity demand increases

This is so commonly found that economists often try to find exceptions to this rule.

Your Demand Curve

Demand curves are often used in tandem with other core economic principles.

Applying core principles

Let’s look back at Sam’s example and apply the core principles to his case:

  • Marginal Principle: Instead of “How many chocolates?”, think “Can I get one more chocolate?”
  • Cost-Benefit Principle: If Benefits higher than Cost in a Marginal Choice, buy chocolate!
  • Opportunity Cost Principle: What else could Sam buy other than chocolate?
    • Maybe Ice Cream? If not, how much value am I giving up for chocolate?

Rational Rule for Buyer

Buy more if marginal benefit of an item is greater or equal to price.

  • Keep doing so until $$\text{Price}=\text{Marginal Benefit}$$

Demand = Marginal Benefit

  • Price = Marginal Benefit
  • Demand is the price you’re willing to pay at a quantity
  • The Price you want to pay is informed by the Marginal Benefit you recieve

Therefore Demand and Marginal Benefit curves are the same

Market Demand

Market Demand curves plot total quantity of item demanded by the market at each price

  • This gives businesses an idea of demand and pricing

Four Steps to Estimate Market Demand

  1. Survey: Ask everyone quantity they buy at each price
  2. Sum: For each price point, add up total quantites from all customers
  3. Scale: Raise quantities to represent entire market
  4. Plot: Make a curve of total quantity at each price

Market Demand Curve

These curves are downward sloping based on the Law of Demand

  • Low prices attract current customers more + bring new customers into market

If there is a change in price, simply move along the curve to the desired quanity

  • You DO NOT need to create a new curve and survey to see price impact
  • As price changes and a point on the demand curve moves, change in quantity is demanded

Personal Note

  • I left out the last part of today’s lecture (Beginning of Demand Curve Shifts) because it’s more cohesive to sum it up with the next lecture.
  • This lecture was pretty fun, the prof abused a poor guy with a bunch of chocolate