Download Law of Demand

LAW OF DEMAND
a. Define the Law of Supply and the Law of Demand.
LAW OF DEMAND
 The Law of Demand states that consumers will be motivated to buy more
goods and services at lower prices than at higher prices
 as price increases, the quantity demanded decreases
 there is an inverse relationship between price and quantity demanded on the
demand curve in a market
 remember that the demand curve is downward-sloping by remembering that
demand starts with the letter D for Downward-sloping
3 CONCEPTS THAT EXPLAIN
THE LAW OF DEMAND
Income Effect
Substitution Effect
Diminishing Marginal Utility
DEMAND
SCHEDULE
A DEMAND
SCHEDULE
S I M P LY S H OW S
T H E Q UA N T I T Y
DEMANDED AT
SEVERAL
DIFFERENT
P RI C E S.
A DEMAND
C U RV E I S J U S T
A GRAPHIC
ILLUSTRATION
OF A DEMAND
SCHEDULE
S H OW I N G T H E
RELATIONSHIP
BETWEEN
PRICE AND
Q UA N T I T Y
D E M A N D E D.
CHANGE IN QUANTITY
DEMANDED VS. CHANGE
IN DEMAND
Change in quantity demanded
Change in demand
DETERMINANTS OF
DEMAND
 Factors that cause the entire demand curve to shift to
the right or left, instead of merely causing movement
along the curve.
5 DETERMINANTS
 Consumer taste and Preference
 Market Size
 Income
 Prices of Related Goods
 Consumer Expectations
TASTES AND PREFERENCES
This slide illustrates
how increased
popularity of a good
causes the Demand
Curve to shift to the
right. The demand
increases at every
possible price. People
are willing to pay more
because it is in style.
MARKET SIZE
The larger the market the more
demand.
Before the ad campaign few
people knew of the product but
after running a tv commercial in
a large city more people are aware
of the product which causes an
increase in demand.
DEMAND AND MARKET
SIZE
An increase in the
number of buyers
results in an increase in
demand. A national ad
campaign increases
awareness of a product.
A decrease in buyers (in
red) would result in the
curve shifting left.
INCOME EFFECT
As income increases it
generally causes an
increase in demand.
INCOME AND DEMAND:
NORMAL GOODS
T-BONE STEAK
A good is a
normal good if an
increase in income
results in an increase
in the demand for
the good.
INCOME AND DEMAND:
INFERIOR GOODS
SPAM
A good is an inferior
good if an increase in
income results in a
reduction in the demand
for the good. This
demand curve is for
Spam, when the
minimum wage rises
more people buy steak
instead of Spam
resulting in a decreased
demand for Spam.
PRICE OF RELATED GOODS
 Substitute Goods
Products that can be
used to replace the
purchase of similar
goods when prices rise.
CHANGE IN THE PRICE OF
A SUBSTITUTE GOOD
 Price of coffee rises: The rise in coffee prices causes some people to switch to Tea
as a substitute, as a result the Demand Curve for Tea shifts to the right.
C O M P L E M E N TA R Y G O O D S
C O M P L E M E N TA RY G O O D S A R E G O O D S
THAT ARE USED TOGETHER SUCH AS
HOT DOGS AND HOT DOG BUNS OR
PA I N T A N D PA I N T B R U S H E S . W H E N T H E
PRICE OF ONE CHANGES IT CHANGES
N O T O N L Y T H E Q UA N T I T Y D E M A N D
FOR THAT ITEM BUT ALSO FOR ITS
C O M P L E M E N T. P R I C E O F H O T D O G S
R I S E S W H I C H C AU S E S N O T O N LY T H E
Q UA N T I T Y D E M A N D E D F O R H O T D O G S
TO DECREASE BUT ALSO THE DEMAND
FOR HOT DOG BUNS TO SHIFT TO THE
L E F T.
CHANGE IN THE PRICE OF A
C O M P L E M E N TA RY G O O D
 Price of DVDs rises: because the price of DVD’s has risen fewer
people are buying DVD players.
CONSUMER EXPECTATIONS
EXPECTATIONS
 A higher expected future price will increase current
demand.
 A lower expected future price will decrease current demand.
 A higher expected future income will increase the demand
for all normal goods.
 A lower expected future income will reduce the demand for
all normal goods.