Announcements:

• Today =Finish Ch 1 and begin chapter 2

• Achieve intro stuff (Module 0) and Chapters 1
and 2 PCT due on Sept 18.
• All other Achieve homework for chapters 1
and 2 due on Sept 20. (but should do before
then!)
• Questions? Post in the Discussion boards on
Canvas!
 Scarcity and Choice
Recall:
economics The study of how individuals
and societies choose to use the scarce
resources to satisfy unlimited wants.

These resources come from nature and

previous generations (technology, capital,
etc).
 Back to The Economic Problem:
There are three “big” questions facing all economic
systems:
(1) What gets produced?
(2) How is it produced?
(3) Who gets it?

Given scarce resources, how exactly do large, complex

societies go about answering the three basic
economic questions?

There are three basic “types” of economy. In each of

these, the three questions are answered differently.
 Economic Systems
TRADITIONAL ECONOMIES

traditional economy An economy in

which tradition alone determines the
nature of economic activity.

Tradition answers all three questions.

Example: Shell trading in the Trobriand

Islands. Necklaces go clockwise,
armbands counterclockwise.
 Economic Systems
COMMAND ECONOMIES

command economy An economy in which a

central government either directly or
indirectly sets output targets, incomes, and
prices. (aka “centrally planned”)

Those in charge answer all three questions.

Example: North Korea, Cuba in the 1980s

and 90s (not as much today).
 Economic Systems
LAISSEZ-FAIRE OR MARKET ECONOMIES:
THE FREE MARKET

laissez-faire or market economy (aka pure

capitalism) Literally from the French: “allow [them]
to do.” An economy in which individual people and
firms pursue their own self-interests without any
central direction or regulation. The market
determines what is produced, how it is produced,
and who gets it.
market The institution through which buyers and
sellers interact and engage in exchange.
 Market Economies
• Market economies are based on the concept
of private ownership.
• “Ownership” means that people should be
able to do what they want with the things
they buy (so long as no one else gets harmed)
and prevent others from using them. More on
this later in the course.
 Market Economies
Market Economies are also based on the ideas of
Consumer Sovereignty and Free Enterprise

consumer sovereignty The idea that

consumers ultimately dictate what will be
produced (or not produced) by choosing
what to purchase (and what not to
purchase).

free enterprise The freedom of individuals

to start and operate private businesses in
search of profits.
 Market Economies
• Examples: No pure market
economies. Hong Kong, Singapore,
and New Zealand may be “closest.”

• United States is “mostly” a market

economy.
 3 Questions in a Market Economy
(1) What gets produced?
Determined by people “voting” with their dollars
(demand).
•“Voting patterns” change over time.
•Some things get no votes - so don’t get produced.
•Voting can vary by region.

(2) How is it produced?

Determined by the cost of production and the
preferences of consumers.
•Different materials or technologies are available.

(3) Who gets it?

Those who pay for it.
 Economic Systems
The United States (as do most countries) has
a mix of all three types of economy.

Traditional:
Tipping

Command:
Welfare, Roads, USDA, Military

Market:
iPhones, Twix Bars, most stuff
 Economic Systems
MIXED SYSTEMS, MARKETS, AND GOVERNMENTS

The differences between traditional

economies, command economies and
laissez-faire economies in their pure
forms are enormous. In fact, these pure
forms do not exist in the world; all real
systems are in some sense “mixed.”
 Why “mixed” and not “market”?
Even staunch defenders of the free enterprise system
recognize that market systems are not perfect.

•First, they do not always produce what people want at

lowest cost—there are inefficiencies.
•Second, rewards (income) may be unfairly distributed,
and some groups may be left out.
•Third, periods of unemployment and inflation recur
with some regularity.
•There are also things called “market failures” that may
cause more inefficiency (more on this later).
 Because of these issues, the government is often
needed to “fix” what is wrong with the system.
 iClicker
The US economy is best described as:
A. A market economy
B. A command economy
C. A traditional economy
D. A mixed economy
 Demand: Thinking
Like a Buyer

Copyright © 2020 by Macmillan Learning. All rights reserved

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition
 Chapter Objective

Understand people’s buying, or demand,

decisions.

Or…why do we buy what we buy?

Keys:

Copyright © 2020 by Macmillan Learning. All rights reserved

• Price
• Other stuff

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

Price Theory
• In a free market system, the basic economic
questions are answered without the help of a
central government plan or directives.
• Individuals pursuing their own self-interest will go
into business and produce the products and
services that people want.
• Others will decide whether to acquire skills; whether
to work; and whether to buy, sell, invest, or save the
income that they earn.
• The basic coordinating mechanism is price. The
unfettered movement of price is what defines a
“free” market.
Market economy: setting the scene
For a market economy to work, we need to have an
established system of Private Property:
Three entitlements to private property:
1. The right to consume your property and use
it so long as you don’t harm others.
2. The right to transfer or sell property
(including your labor) to whomever you
please.
3. The right to exclude anyone from using your

Copyright © 2020 by Macmillan Learning. All rights reserved

property or interfering with it.
With these conditions in place, people have incentives
to buy their own stuff (and to try to earn money to
buy that stuff)
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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Model of Supply and Demand

 There are three elements to our simple model:

1. households
2. firms
3. the markets where consumers and producers
interact
• Input markets

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• Output markets

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Market players
1. Households Consume outputs,
supply inputs.

2. Firms Organizations that transforms

resources (inputs) into products (outputs).
They consume inputs and supply outputs.
(see ch. 3 for types of firms)

Later we will add government and the “rest

of the world”.
 Markets
There are two types of Markets

product or output markets The markets in

which goods and services are exchanged
(Households demand, firms supply).

input or factor markets The markets in which

the resources used to produce products are
exchanged. (Households supply, firms demand)
• Land
• Labor
• Capital
• Entrepreneurial ability
Input Markets And Output Markets:
The Circular Flow
Input and output markets are connected through
the behavior of both firms and households.

Firms determine the types and quantities of

products supplied (or produced) and the types of
quantities of inputs demanded.

Households determine the types and quantities of

products demanded and the types and quantities of
inputs supplied.
Input Markets And Output Markets:
The Circular Flow

The Circular Flow of Economic Activity

 Perfect Competition
• For the next little while, we will be making an
important (but not super realistic) assumption.
• We will assume the market we are talking about is
“Perfectly Competitive”
• In short, what this means is that there are lots of
buyers and lots of sellers. And that no individual
buyer or seller can influence the price of the good.

Copyright © 2020 by Macmillan Learning. All rights reserved

• In other words, everyone on both sides is a “price
taker” that takes the price from the market and
reacts to it by choosing a quantity to buy or sell.
(more on this later)
25

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

OUTPUT MARKETS
DEMAND AND THE DEMAND
CURVE
 Roadmap (1 of 5)
 Individual Demand: What You Want, at Each Price
 Discover the shape of your individual demand curve.
 Your Decisions and Your Demand Curve
 Apply the core principles of economics to make good demand
decisions.
 Market Demand: What the Market Wants
 Add up individual demand to discover market demand.

Copyright © 2020 by Macmillan Learning. All rights reserved

 What Shifts Demand Curves?
 Understand what factors shift demand curves.
 Shifts versus Movements Along Demand Curves
 Distinguish between movements along a demand curve and shifts in
demand curves.
27

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Demand

• Let’s think about how buyers decide what and how

much of something to buy.
• Important to this is that buyers cannot choose what
price to pay.
• Instead they decide how much to buy based on
prices and other factors.

Copyright © 2020 by Macmillan Learning. All rights reserved

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Demand
• Demand: A relationship between the price of a
good and the quantity of that good that consumers
are willing and able to buy per period, other things
constant (Line or Curve).
• Quantity demanded: The amount (number of units)
of a product that a consumer would buy in a given
period if it could buy all it wanted at the current
market price.

Copyright © 2020 by Macmillan Learning. All rights reserved

• Law of Demand: Price and quantity are inversely
related. As price goes up, quantity that people want
to buy falls (all else equal).

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Substitution and Income Effects
Basically, the law of demand says that as the price of a
good rises, people buy less of that good.
There are 2 reasons for this:

1. The “substitution effect”: As the price of one good

rises, people switch from buying that good to buying
other goods (usually “substitutes”)

2. The “income effect”: as the price of anything you buy

goes up, you feel poorer so you buy less of everything
(including the good whose price rose).

Copyright © 2020 by Macmillan Learning. All rights reserved

The opposite takes place if the price falls – buy more of the
good whose price fell (sub. effect) and buy more of
everything since you now feel richer (inc. effect).
30

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

• If your rent goes up, you move to a new apartment.

This is an example of the:
A. Income effect
B. Substitution effect

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31

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

• If your rent goes up, you cancel Netflix. This is an

example of the:
A. Income effect
B. Substitution effect

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

Demand In Product/Output Markets
PRICE AND QUANTITY DEMANDED:
THE LAW OF DEMAND

demand schedule A
table showing how
much of a given
product a household
would be willing to
buy at different
prices (during a fixed
time period).
Demand In Product/Output Markets
demand curve A graph illustrating how much of a given
product a household would be willing to buy at different
prices (giving a fixed time period).
 An Individual Demand Curve

What is an individual demand curve?

 An individual demand curve is a graph plotting
the quantity of an item that someone plans to
buy at each price.
 It reflects the question that you face as a buyer
every day: At this price, what quantity should I
buy?

Copyright © 2020 by Macmillan Learning. All rights reserved

 An individual demand curve holds other things
constant. (we’ll talk about those “other things”
in a bit)
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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Graphing Conventions

Don’t forget to label the

units on both axes!
 In this case, the price of
gas is measured in dollars
per gallon and is depicted
on the vertical axis
 The quantity of gas

Copyright © 2020 by Macmillan Learning. All rights reserved

demanded is measured in
gallons per week and is
depicted on the horizontal
axis
36

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 “Holding Other Things Constant”

 When illustrating an individual demand curve, we ask

how much we would be willing to purchase at each
price, holding other things constant.
 We know that things other than price can influence your
demand. Your demand for gas, for example, might
change if you buy a more fuel-efficient car.
 The interdependence principle reminds us not to forget
these connections!

Copyright © 2020 by Macmillan Learning. All rights reserved

 But first, we want to consider what happens when the
price — and only the price — changes.

37

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Some Math
• If you were to write the equation for these “linear demand
curves”, it would look like this:

𝑄 =𝑎−𝑏∗𝑃

• Where Q=Quantity and P=Price. “a” is how much you’d

take if it were free.
• Sometimes we flip this into an “inverse demand function”
so that it’s easier to graph (since P is on the Y axis)

Copyright © 2020 by Macmillan Learning. All rights reserved

𝑎 1
P= − ∗𝑄
𝑏 𝑏

• Where a/b is the reservation price and -1/b is the slope.

• But we’re not going to use these. 38

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 The Law of Demand
 In the previous exercise,
you saw that your
individual demand curve
was downward-sloping.
This is explained by the
law of demand.
 Law of demand: The
quantity demanded is

Copyright © 2020 by Macmillan Learning. All rights reserved

higher when the price is
lower -- holding other
things constant!

39

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

The individual demand curve follows the law of demand.

This means which one of the following?
A. When the price of the good rises, its quantity
demanded rises.
B. When the price of the good falls, its quantity demanded
rises.
C. When the price of the good falls, its quantity demanded

Copyright © 2020 by Macmillan Learning. All rights reserved

remains the same.
D. There is no relationship between the price of the good
and its quantity demanded.

40

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Roadmap (2 of 5)
 Individual Demand: What You Want, at Each Price
 Discover the shape of your individual demand curve.
 Your Decisions and Your Demand Curve
 Apply the core principles of economics to make good
demand decisions.
 Market Demand: What the Market Wants
 Add up individual demand to discover market demand.


Copyright © 2020 by Macmillan Learning. All rights reserved

What Shifts Demand Curves?
 Understand what factors shift demand curves.
 Shifts versus Movements Along Demand Curves
 Distinguish between movements along a demand curve
and shifts in demand curves.
41

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Your Decisions and Your Demand Curve

 Let’s think about the decision of buying stuff.

 What are the best buying choices you can make?
 Apply the core principles of economics:
 the marginal principle.
 What are the marginal costs and benefits of “one
more”

Copyright © 2020 by Macmillan Learning. All rights reserved

 the cost-benefit principle.
 Compare those costs and benefits.
 the opportunity cost principle.
 What else could I do with my money?
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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 The Rational Rule for Buyers (1 of 2)

 The Rational Rule for Buyers: Buy more of an

item if its marginal benefit is greater than (or equal
to) the price.
 Keep buying until price = marginal benefit.

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43

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 The Rational Rule for Buyers (2 of 2)

The demand curve is also the

marginal benefit curve.
 Price = Marginal benefit
 The demand curve illustrates
the price at which you are
willing to buy each quantity.

Copyright © 2020 by Macmillan Learning. All rights reserved

44

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Why Is Your Demand Curve Downward-
Sloping?
 Diminishing marginal benefit (or “utility”): Each
additional item yields a smaller marginal benefit than
the previous item.
 Let’s say you are trying to decide how many scoops of
ice cream you want:
 One or two scoops are scrumptious.
 A third scoop still tastes pretty good.

Copyright © 2020 by Macmillan Learning. All rights reserved

 By the fourth, you’re getting tired of all the sugar.
 And a fifth scoop makes you feel sick.
 The point is that as you eat more ice cream, the marginal
benefit of another scoop keeps getting smaller. You’ll buy
it only if the price is lower. 45

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Diminishing Marginal Utility

Think about most of the things you usually buy.

 How do you feel when you buy one for the first
time?
 And how do you feel when you buy a second one?
A third?
 Law of diminishing marginal utility: As you

Copyright © 2020 by Macmillan Learning. All rights reserved

consume more of one thing, holding all else
constant, your additional benefit (or utility) from
each additional until gets less and less (at some
point).
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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

Suppose your marginal benefit of your first cup of

coffee is $4, of your second is $3, and of your third is
$2. If the price of coffee is $3, how many cups of
coffee will you buy?
A. 0 cups
B. 1 cup
C. 2 cups

Copyright © 2020 by Macmillan Learning. All rights reserved

D. 3 cups

47

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Roadmap (3 of 5)
 Individual Demand: What You Want, at Each Price
 Discover the shape of your individual demand curve.
 Your Decisions and Your Demand Curve
 Apply the core principles of economics to make good demand
decisions.
 Market Demand: What the Market Wants
 Add up individual demand to discover market demand.


Copyright © 2020 by Macmillan Learning. All rights reserved

What Shifts Demand Curves?
 Understand what factors shift demand curves.
 Shifts versus Movements Along Demand Curves
 Distinguish between movements along a demand curve and
shifts in demand curves.
48

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Market Demand: What the Market Wants

 What is the market demand curve?

 The market demand curve is a graph plotting the
total quantity of an item demanded, by the entire
market, at each price.
 It is the sum of the quantity demanded by each
person.
 Individual demand curves are the building blocks of

Copyright © 2020 by Macmillan Learning. All rights reserved

market demand.

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

Demand In Product/Output Markets

MOVING FROM HOUSEHOLD DEMAND

TO MARKET DEMAND

market demand The sum of all the

quantities of a good or service demanded
per period by all the households buying in
the market for that good or service.
Household Demand To Market Demand

Deriving Market Demand from Individual Demand Curves

 The Market Demand Curve Is Downward-
Sloping.
 Market demand curves obey the law of demand:
The total quantity demanded is higher when the
price is lower.
 Price changes quantity demanded for both new and
old customers.
 When prices are low, current customers buy more.
 When prices are low, the number of customers

Copyright © 2020 by Macmillan Learning. All rights reserved

increases.

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

Suppose you and your 99 classmates all have

identical marginal benefits for coffee: the marginal
benefit of the first cup is $4, of the second is $3, and of
the third is $2. If the price of coffee is $3, what is the
quantity demanded in the market?
A. 300 cups

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B. 200 cups
C. 100 cups
D. 0 cups

53

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Roadmap (4 of 5)
 Individual Demand: What You Want, at Each Price
 Discover the shape of your individual demand curve.
 Your Decisions and Your Demand Curve
 Apply the core principles of economics to make good
demand decisions.
 Market Demand: What the Market Wants
 Add up individual demand to discover market demand.

Copyright © 2020 by Macmillan Learning. All rights reserved

 What Shifts Demand Curves?
 Understand what factors shift demand curves.
 Shifts versus Movements Along Demand Curves
 Distinguish between movements along a demand curve
and shifts in demand curves. 54

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 But first…Movement Along the Demand Curve

 Movement along the

demand curve: The
movement from one point on
a fixed demand curve to
another point on the same
curve that is caused by a
price change.
 Change in the quantity

Copyright © 2020 by Macmillan Learning. All rights reserved

demanded: The change in
quantity associated with
movement along a fixed
demand curve.

55

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Changes in “Quantity Demanded” vs.
Changes in “Demand”
The most important relationship in individual
markets is that between market price and quantity
demanded.
•Changes in the price of a product affect the quantity demanded
per period. And move us along the D curve.

A change in any other factor affects demand and shifts

the entire D curve. Thus, we say that an increase in
the price of Twix Bars is likely to cause a decrease in
the quantity of Twix Bars demanded. However, we say
that an increase in income is likely to cause an increase
in the demand for Twix Bars.
 Changes in “Quantity Demanded” vs.
Changes in “Demand”

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57

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Shifting the Demand Curve

The interdependence principle reminds you that a

buyer’s choice also depends on many other factors
beyond price and that when these other factors
change, so might their demand decisions.
 Shift in the demand curve: A movement of the
demand curve itself.
 Increase in demand: A shift of the demand curve

Copyright © 2020 by Macmillan Learning. All rights reserved

to the right.
 Decrease in demand: A shift of the demand curve
to the left.
58

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Shifts in the Demand Curve

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59

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 What Shifts Demand?

 Factors that shift both individual and market

demand curves include the following:
1. income.
2. preferences.
3. prices of related goods.
4. expectations.

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5. congestion and network effects.
 Factors that shift only market demand curves
include the following:
6. the type and number of buyers.
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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Demand Shifter 1: Income
Changes in income (or wealth) can shift demand curves.
 Normal good: A good for which higher income (or wealth)
causes an increase in demand.
 Examples: electronics, toys, movies, clothes, most stuff

 Inferior good: A good for which higher income (or wealth)

causes a decrease in demand.

Copyright © 2020 by Macmillan Learning. All rights reserved

 Examples: potatoes, ramen noodles, Genesee Cream Ale,
generic anything, used cars (not “vintage” or “antique,” just
used).

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Shifting Demand
Income vs. Wealth

income The sum of all a household’s

wages, salaries, profits, interest
payments, rents, and other forms of
earnings in a given period of time. It is a
flow measure.

wealth or net worth The total value of

what a household owns minus what it
owes. It is a stock measure.
 Normal and Inferior Goods

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63

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

• If your income goes up and pizza is a “normal

good”, what will happen to your demand curve for
pizza?
A. It will shift back
B. It will shift out
C. It will stay the same but you will move to a new

Copyright © 2020 by Macmillan Learning. All rights reserved

point on the curve
D. Nothing

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Demand Shifter 2: Your Preferences
Changes in preferences can shift demand curves.
 Companies spend billions of dollars each year
attempting to influence our preferences through
advertising.
 Social pressure can shift your demand curve.
 Preferences are also affected by fashion trends.

Copyright © 2020 by Macmillan Learning. All rights reserved

65

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Demand Shifter 3: Prices of Related Goods
Changes in the prices of related goods can shift
demand curves.
 Complementary goods: Goods that go together.
 Your demand for a good will decrease if the price of
complementary goods rises.
 Examples: hot dogs and hot dog buns, Nintendo
Switch and games.
 Substitute goods: Goods that replace each other.

Copyright © 2020 by Macmillan Learning. All rights reserved

 Your demand for a good will increase if the price of
substitute goods rises.
 Examples: Coke or Pepsi, Switch or Xbox
66

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Complements (draw the graph)

67

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Substitutes (draw the graph)

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

Which one of the following pairs lists goods that are

NOT substitutes?

A. hamburger and veggie burger

B. pen and pencil
C. bus and train

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D. car and gas

69

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Demand Shifter 4: Expectations
Expectations, especially about the future, can shift
demand curves.
 If you believe prices might rise, you will make
your purchase today, increasing today’s
demand.
 If you believe prices will fall, you will delay your
purchase, decreasing today’s demand.

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 If you think your income might fall in the future,
you are less likely to buy something now (more
likely to save)

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Demand Shifter 5: Congestion and Network
Effects
How other people use goods can affect demand curves.
 Network effect: The effect that occurs when a good
becomes more useful because other people use it.
 If more people buy (or use) such a good, your benefit
from and demand for it will also increase.
 Example: popular social media platforms
 Congestion effect: The effect that occurs when a good
becomes less valuable because other people use it.

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 If more people buy (or use) such a product, your demand
for it will decrease.
 Example: roads, restaurants (especially now!)

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 Demand Shifter 6: Type and Number of Buyers
 If the composition of the
market changes, market
demand will also change.
 Market demand increases
over time as the
population grows.
 Population trends matter:
 more elderly=higher demand

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for comfortable shoes and
Buicks.
 more kids=more demand for
daycare, minivans, Legos
and Xbox.
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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

Which of the following would change market demand

curves without shifting individual demand curves?

A. the number of buyers

B. buyers’ beliefs about the future
C. the income of buyers

Copyright © 2020 by Macmillan Learning. All rights reserved

D. the preferences of buyers

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 Roadmap (5 of 5)
 Individual Demand: What You Want, at Each Price
 Discover the shape of your individual demand curve.
 Your Decisions and Your Demand Curve
 Apply the core principles of economics to make good
demand decisions.
 Market Demand: What the Market Wants
 Add up individual demand to discover market demand.

Copyright © 2020 by Macmillan Learning. All rights reserved

 What Shifts Demand Curves?
 Understand what factors shift demand curves.
 Shifts versus Movements Along Demand Curves
 Distinguish between movements along a demand curve
and shifts in demand curves. 74

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

Change in “Demand” vs. Change in
“Quantity Demanded”
shift of a demand curve The change that takes
place in a demand curve corresponding to a
new relationship between quantity demanded
of a good and price of that good. The shift is
brought about by a change in the “original
conditions” (1-6). A change in DEMAND.

movement along a demand curve The change

in QUANTITY DEMANDED brought about by a
change in price.
Shifts versus Movements Along Demand Curves

A simple rule of thumb:

 When the price changes: you’re thinking about
a movement along the demand curve.
(change in quantity demanded)
 When other factors change: you need to think
about shifts in the demand curve (change in

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demand).

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

Shifts versus Movements Along Demand Curves

Copyright © 2020 by Macmillan Learning. All rights reserved

77

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

Shifts versus Movements Along Demand Curves

Copyright © 2020 by Macmillan Learning. All rights reserved

78

PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

Shifts versus Movements Along Demand Curves

Copyright © 2020 by Macmillan Learning. All rights reserved

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker

Which of the following would decrease the quantity

demanded (move along the demand curve)?

A. an increase in the price of a complement

B. an increase in the number of buyers
C. an increase in the expected future price

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D. an increase in the current price

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker
Which of the following does not shift the demand
curve (change demand).
A. A change in tastes
B. A change in consumer expectations
C. A change in prices of other goods (subs. and
comps.)
D. A change in the price of the good

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E. A change in income

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition

 iClicker
The figure below shows the market for beer.
Assume that hot wings and beer are
complements. Which move would best describe
the impact of a decrease in the price of hot
wings on this diagram? Market for Beer

a. The move from A to B.

b. The move from A to C.
c. Both a and b above.

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d. None of the above.

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition
 Key Takeaways
 Individual demand is the quantity an individual is willing to
purchase at each price, holding everything else constant.
 Individual demand is determined using the core principles of
marginal cost, cost-benefit, and opportunity cost.
 Rational buyers purchase the quantity at which price equals
marginal benefit.
 The market demand is the sum of individual demands at
each price.

Copyright © 2020 by Macmillan Learning. All rights reserved

 Changes in price lead to movements along the demand
curve; changes in factors other than price shift the
demand curve.

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PRINCIPLES OF ECONOMICS Betsey Stevenson – Justin Wolfers | First Edition