Demand

The demand for coffee has grown significantly over the years: an annual rate of 1.5%. WHY?

• One cause would be the expansion of the coffee culture and in particular the growth in the number of coffee shops.
• There has also been in increased interest in the capsule system for coffee. (What's that?)
• The second trend is the urbanization processes in emerging countries. Many people migrate from the countryside to the cities, try coffee for the first time and then start consuming it.
• A report from Bloomberg's included research showing that "Daily consumption among 18- to 24-years-olds rose to 48 percent from 34 percent, while it climbed to 60 percent from 51 percent among those aged 25 to 39, according to the National Coffee Association in New York."
• It was also reported that millennials started drinking coffee at a much earlier age than older generations, mostly because they didn't want to consume the less healthy caffeine alternative of soda.

As we work through this unit, you will be discover how these factors match up with the way Economics describes DEMAND.

Is the part of economics that studies small units, such as individuals and firms. Our microeconomic concepts help explain how prices are determined and how individual economic decisions are made. For this entire unit on price, we will be applying microeconomic theory.

Now getting technical:

Demand in economics is...

• how many goods and services are bought at various prices during a certain period of time.
• the consumer's need or desire to own the product or experience the service.
• constrained by the willingness and ability of the consumer to pay for the good or service at the price offered.

And what about the fundamental problem of economics? Unlimited wants (demand) and limited resources. This drives economic growth and expansion. Without demand, no business would ever bother producing anything.

For practically every good or service that we might buy, higher prices are associated with smaller amounts demanded. Conversely, lower prices are associated with larger amounts demanded.

This is known as the Law of Demand - consumers will buy more of a product at lower prices and less at higher prices. Just looking at consumer behaviors, we can see that any time there is a product on sale, consumers will increase the quantity that they purchase.

Economists use the term utility to describe the amount of usefulness or satisfaction that someone gets from the use of a product. Marginal utility then is the additional satisfaction or usefulness a consumer gets from having one or more unit of a product.

This helps explain a great deal about demand, because the reason we buy something is due to the fact that we feel the product is useful and will give satisfaction. However, eventually there will be diminishing marginal utility in that we have a decrease in satisfaction or usefulness from having one or more of the same product. When we have diminishing satisfaction, we are not willing to pay as much for the second, third, fourth and so on as we would have for the first product.

This is why the Demand curve is DOWNWARD SLOPING.

Change in Quantity Demanded

There is only ONE reason for a change in quantity demanded: price. When prices go down, we are willing to buy more. When prices go up, we want less.

This is due to what economists call the income effect and the substitution effect. Basically, when the price of a good goes up, we feel like we have less income, and in comparison, other related goods seem cheaper.

Substitution Effect: A change in quantity demanded due to a change in the relative price of a product.

Income Effect: A change in the quantity demanded due to a change in price that alters a consumer's real purchasing power.

But there are some things that make people want more or less of a good AT ANY PRICE. (i.e. the whole demand curve shifts) These are called determinants of demand. And they produce a change in demand.

1. Change in consumer income: an increase in income means people can afford to buy more at all possible prices, and then on the opposite side a decrease would reduce the quantity demanded.
2. Change in consumer Tastes: we as consumers are easily swayed by advertising, fashion trends, and sometimes the change in season when it comes to purchasing goods. If a company advertises their products well, then consumers are more swayed to buy, increasing demand. Other situations regarding taste include consumers buying less of a product once they get tired of it, or the development of a newer product.
3. Change in the price of a substitute: competing products that can be used in place of one another. If the price of a substitute increases, therefore the demand of a product tends to increase as well.
4. Change in the price of a complement: products that increase the use of other products. An increase in the price of one good usually leads to the decrease in the demand for its complement.
5. Change in expectations: The way people think about the future can affect demand. (Always related to the future.) For example, if Samsung announces that it will release a TV with the newest advanced technology one year from now, consumers may hold off on buying a TV due to the expectations of what will come. This expectation would cause demand to decline. However, if there was an expectation of a future shortage of some type of good, then customers would become more eager to buy, and therefore would increase the current demand of that product.
6. Change in number of consumers: increase or decrease in number of people interested in purchasing a product. (Or a population change in general.)

Elasticity

See PDF below PPT presentation.

This blurb may help you think through your project:

All businesses try to understand or guide consumer demand, so they can be the first or the cheapest in delivering the right products and services. If something is in high demand, businesses make more revenue. If they can't make more fast enough, the price goes up. Conversely, if demand drops then businesses will first lower the price, hoping to shift demand from their competitors and take more market share. If demand isn't restored, they will innovate and create a better product. If demand still doesn't rebound, then companies will produce less and lay off workers. This contraction phase of the business cycle can end in a recession.

Helpful Videos!

Sources

• https://www.washingtonpost.com/news/business/wp/2016/10/31/look-how-much-coffee-millennials-are-drinking/?utm_term=.046319f6656a
• https://www.thebalance.com/what-is-demand-definition-explanation-effect-3305708
• Econ Low Down - Demand