Do Graph Quizzes & Complete Quiz 1 by October 5th
Making Smart Choices
The Law of Demand
Price Quantity Demanded Price Quantity Demanded
$0 350 $8 2
$1 250 $9 4
$2 200 $10 5
$3 40 $15 4
$4 15 $20 1
What are the factors that went into your choice for not raising your hand and raising your hand? Your
preference, thirst, attention wants, how much money you have, how much the drink costs elsewhere
(substitute), what else can you get for $20?, convenience and what the money is going towards.
As the price goes up, quantity demand goes down (linear relationship). And the biggest drop off was at
$2 because people know the cost of the Arizona drink.
Weighing Benefits, Costs & Substitute
Your willingness to buy a product/service depends on your ability to pay, comparative benefit and costs
and the availability of substitutes.
Preferences - your wants and their intensities
Demand - consumers' willingness and ability to pay for particular product/service
People who want the product/service, at the end of the day, are people who has desire and have the
MONEY to pay for them. What you are willing and able to pay or give up depends on the cost and the
availability of substitutes.
There is no substitute for concerts. Watching a performance and the experience from it is fundamentally
different than listening to music via headphones.
Living on the Edge
Count only additional benefits and additional costs. Additional benefit means marginal benefit, not total
benefit and marginal benefit changes with circumstances.
One's willingness to pay changes with circumstance. Margin is different from total. And marginal benefit
is what economists use. Marginal Benefit
Additional benefit from a choice and this changes with circumstances
Water and Diamond Paradox
Water, regardless of its importance to survival, is cheap. Diamonds are completely unnecessary but they
have a high price. There is a lack of correlation between how important something is to you and the
price one is willing to pay. What is the willingness at margin? Your first drink of water in a desert is
worth fortune to you. However, water in our society is abundant. All those waters you drank might have
a high total benefit. But the additional water you drink might have a low marginal benefit. For diamonds,
it is scarce, and has a low total benefit because all the diamonds combined don't worth much compared
to water. But because it is scarce and has a status value, one will be more satisfied with the next
additional diamond than the next water.
Total benefit of water is if you add up the marginal benefit of every glass of water, that is the total
Terminology of quantity demanded, you will be confused by demand.
Market Demand - sum of demands of all individuals willing to and able to buy a particular
product/service (Arizona tea example)
Law of Demand - if the price of a product/service rises, quantity demanded decreases.
Price and quantity demanded has an inverse relationship.
Demand changes with changes in, Preferences, Prices of Related Goods, Income, E