Download AP Macro Economics - Spring Branch ISD

Economics
Lecture Outline
Demand
I.
Quantity Demand:
1. Demand – a record of how consumers buying habits change in response to
price changes.
2. Demand = the quantities of products consumers are willing and able to buy at
various prices during a given time period.
3. We have demand for something because we expect it to be useful to us and
satisfy our wants and needs.
4. Demand is affected by price and non-price factors called (TIMER.) Which
stands from:
Taste, income, market size, expectations, related good price changes
5. The Law of Quantity Demand – as price decreases, quantity demanded
increases; however, as price increases, quantity demanded decreases.
Thus there is an Inverse relationship between price and quantity demanded.
Thus a change in quantity demanded represents a change in price.
6. So graphically, a change in quantity demanded is illustrated as a price change,
which is a movement up or down on the demand curve.
Thus demand refers to the whole curve (all prices on the curve.) And quantity
demanded refers to a point on the curve based on a particular price.
7. Reasons for down sloping “Demand” Curve:
 Income Effect – At lower prices, current buyers are richer & will buy more.
 Substitution Effect– Buyers of higher priced substitutes will buy the lower
priced substitutes.
 Diminishing Marginal Utility - Buyers will buy more only when the price is
lowered.
8. The Law of Diminishing Marginal Utility – Utility (satisfaction) decreases as
more of the same product is consumed.
II.
Elasticity of Demand:
9. Elasticity of Demand – the way price affects quantity demanded.
 Elastic-when quantity demanded is very responsive to price.
 Inelastic-when a change in price has little impact on quantity demanded.
10. Elasticity (flexible demand) is affected by:
 Substitutes(margarine for butter)
 Luxury (wool coat for mink coat)
 Expensive (used car or new car)
 Has durability (refrigerator or ice-chest)
 Lasts a long time (gas-guzzling car verses energy efficient car)
11. Inelastic (inflexible demand) is affected by:
 No substitutes (milk or water on cereal)
 Necessity (insulin)
 Inexpensive (safety pin)
 No durability (pencil or pen)
 Lasts only a short time (bread)
12. When estimating the Elasticity of Demand 3 Key Questions must be answered:
 Are there substitutions to the product?
 Is the product a necessity?
 Is the product expensive?
Answer yes to two or more of these questions will mean the product is elastic.
13. Producers (sellers) want to know the elasticity of their product in order to
maximize their total receipts (profit.) A decrease in price will create more total
receipts for elastic products. A decrease in price will create less total receipts for
inelastic products.
III.
Change in Demand:
14. Change in demanded means that consumers change their minds at each and every
price. There is a quantity change but it is not caused by a change in price. Thus
the entire demand curve shifts either to the right or left of the original line.
Quantity demand increases if demand increase, and quantity demand decreases if
demand decreases.
15. Factors that shift demand are called “demand Shifters.”
 Taste – an increase in taste increase demand (direct relationship). An
increase in taste will shift the demand curve right.
a) advertisements
b) Entertainment
c) Major events
 Income – a change in income will change demand.
a) Normal goods – are goods whose demand varies directly with
income.
b) Inferior goods – are goods whose demand varies inversely with
income.
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IV.
Market Size (the number of consumers in the market) - An increase in
market size will cause an increase in demand (direct relationship).
Consumer expectations – Consumer expectations about future product
price, future availability, and future income will affect demand.
Price of Related Goods There are three types of goods:
A. Independent goods – when a price change in one has no impact on
the other (example; fishhooks and pantyhose.)
B. Substitute goods (Competing goods) – when a price change of one
affects the demand of the other directly. (example; 7up and coke.)
Substitute goods have a direct relationship to each other; because
in increase in the price of one will increase the demand for the
other.
C. Complementary goods (go together) – when a price change of one
affects the demand of the other inversely (example; camera and
film.)
Complement goods have an inverse relationship to each other;
because a decrease in the price of one will increase the demand of
the other.
Review:
A change in quantity demanded is caused by a price change, which causes a
movement from one point to another point along the demand curve.
A change in demand is caused by non-price changes (TIMER), which cause the
whole demand curve to shift.
The End!