Download PPT Demand

DEMAND
QUANTITY DEMANDED
SHIFTS IN DEMAND
ELASTICITY OF DEMAND
MICROECONOMICS
THE
DEMAND
STUDY OF
THE BEHAVIOR &
DECISION MAKING
OF SMALL UNITS
SUCH AS
INDIVIDUALS &
FIRMS
Demand
 Demand
= desire, ability and
willingness to own something.
 The law of demand = when a
good’s price is lower,
consumers will buy more of it.
When the price is higher,
consumers will buy less of it.
THE LAW OF DEMAND
As the price of a good or
service rises, the quantity
that is demanded falls and
vice versa, assuming ceteris
paribus.
Ceteris paribus
In the law of demand, we
do not include outside
factors beyond price.
Demand Schedule –
table showing
combinations of price
and quantity
demanded of a good or
service.
The Demand Curve
A demand curve is a graphical
representation of a demand schedule.
 The demand curve is downward sloping
showing the inverse relationship between
price (on the y-axis) and quantity
demanded (on the x-axis)
 When reading a demand curve, assume all
outside factors, such as income, are held
constant. (This is called ceteris paribus)
 Market Demand – the sum of all demand in
a market – demand for Dominos versus
demand for ALL pizza makers…
Let’s draw a new demand curve for milk…

7
GRAPHING DEMAND
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Milk
DID THE
DEMAND
CURVE YOU
DREW FOR
PIZZA LOOK
LIKE THIS?
$5
4
3
2
$3
30
$2
50
$1
80
1
10
20
30
40
50
60
8
Quantity of Milk
70
80
Q
3 BEHAVIOR PATTERNS
THAT AFFECT THE LAW OF DEMAND
THE
SUBSTITUTION
EFFECT
THE
LAW OF DIMINISHING
MARGINAL UTILITY
THE
INCOME
EFFECT
Why does the Law of Demand
occur?
The law of demand is the result of
three separate behavior patterns
that overlap:
The Substitution effect
2.The Income effect
3.The Law of Diminishing
Marginal Utility
1.
We will define and explain each…
10
Why does the Law of Demand
occur?
1. The Substitution Effect
 If
the price goes up for a product,
consumer buy less of that product
and more of another substitute
product (and vice versa)
2. The Income Effect
 If
the price goes down for a product,
the purchasing power increases for
consumers -allowing them to
purchase more.
Why does the Law of Demand occur?
3. Law of Diminishing Marginal Utility




Utility = Satisfaction
We buy goods because we get
utility from them
The law of diminishing marginal
utility states that as you consume
anything, the additional
satisfaction that you will receive
will eventually start to decrease
In other words, the more you buy
of ANY GOOD the less satisfaction
you get from each new unit
consumed.
Change in Quantity Demanded
A change in the quantity of the
product purchased in response
to a change in price – CHANGE IN
QUANTITY demanded –
DEMAND CURVE DOES NOT SHIFT
Movement along the demand
curve is a change in
QUANTITY DEMANDED.
ONLY PRICE changes.
BREAK – BE A PIRATE
PRICE DOESN’T SHIFT THE
CURVE….AARGH
In your BEST pirate voice
please
Change in Demand
A change in the quantity of the
product purchased at all
possible prices - DEMAND
CURVE SHIFTS
Shifts in Demand
 Ceteris
paribus-“all other things held
constant.”
 When the ceteris paribus assumption is
dropped, movement no longer occurs along
the demand curve. Rather, the entire demand
curve shifts.
 A shift means that at the same prices, more
people are willing and able to purchase that
good.
This is a change in demand, not a change in
quantity demanded
17
PRICE DOESN’T SHIFT THE CURVE
Determinants of Demand
B
- Change in Number of Buyers
 R-
Change in Price of Related Goods
(complements and substitutes)
I
- Change in the Consumer Income
T
– Change in Consumer Tastes and
Preferences
 E-
Change in consumers’ price expectations
TERMS
 NORMAL
GOODS – good that
consumers demand more of when
their incomes increase - Steak,
new cars
 INFERIOR GOODS – good that
consumers demand less of when
their incomes increase – great
value, ramen
 COMPLEMENTS
– goods that are
bought and sold together – peanut
butter and jelly – price of peanut
butter goes up…demand for jelly
goes DOWN.
 SUBSTITUTES – goods that are used
in place of another – hamburger or
hot dog – price of hamburger goes
up…… demand for hot dogs goes UP.
Shifts in Demand
4.00
3.50
Demand price
3.00
2.50
A
2.00
B
1.50
C
1.00
D
E
0.50
F
D1
0.00
10
20
30
40
50
60
D2
70
Quantity of pecans per day
80
DEMAND SHIFT
SHIFT RIGHT-INCREASED DEMAND
P
SHIFT LEFT-DECREASED DEMAND
P
S
S
P2
P1
P1
P2
D
Q1 Q2
D2
Q
Q2 Q1
D2 D
Q
DETERMINANTS OF DEMAND-REASONS FOR CHANGES IN DEMAND
CHANGES IN INCOME OR WEALTH
CHANGES IN NUMBERS OF CONSUMERS
CHANGES IN TASTES AND PREFERENCES
CHANGES IN THE PRICE OF RELATED GOODS
SUBSTITUTES
COMPLEMENTS
CHANGES IN CONSUMER EXPECTATIONS
MEMORY AID – “BRITE”

Tastes and Preferences - EX. People prefer the Nike shoe to
other brands because it uses newer technology. Demand
increases, curve shifts right.

Related Goods and Services - Complements and Substitutes –
EX. The price of shoe laces quadruples. People start to wear
more sandals, demand decreases, curve shifts left

Income - EX. NBA gives all players a huge raise, they can now
buy more shoes. Demand increases-Curve shifts right

Buyers, Number of, and Consumer Information - EX. Sports
arena is closed for renovations and all games are moved to a
different county. Fewer Sports fans visit the Nike store next
to the arena. Fewer buyers demanding goods, Demand
decreases-curve shifts left

Expectations - EX. People hear that price of Nikes will go up
in the future. They stock up now. Demand increases-curve
shifts right
SUMMARY –
DEMAND RELATIONSHIP EQUATION
P
D
Q
Demand=consumer=buyer=utility=lower
price=higher quantity demanded=Law of
Demand=spending=inverse relationship=negative
slope=downward curve=revenue curve
NOW YOU PRACTICE

COMPLETE Activities 1 and 3 on Demand

..\Music\Cupid - Cupid Shuffle (Music
Video).mp4
Review – The Law of Demand

Consumers will be motivated to buy more goods and services
at lower prices than at higher prices. In short hand, as price
increases, the quantity demanded decreases.

Therefore, there is an inverse relationship between price and
quantity demanded on the demand curve in a market.

Remember that demand starts with the letter D for
Downward-sloping. On the sample demand curve below, you
can see how the quantity demanded decreases as the price
increases.
P
D
Q
Change in Quantity Demanded vs.
Change in Demand

DEMAND refers to all of the prices and
quantities of consumers in the market for a
good.

A change in the price of a good, service, or
factor of production causes “a movement
along the demand curve” also known as a
“change in quantity demanded”. The price
change causes a movement along the demand
curve showing a different quantity
consumers will purchase at the new price.
This is DIFFERENT from a change in demand
which SHIFTS the entire curve.
Movement along the curve
Ceteris paribus
The graph below shows a change in
quantity demanded and is caused by a price
change NOT a determinant of demand
Change in Demand
Shift in Demand

The curve will move left (decrease) or
right (increase)

This is the result of a change in something
(a determinant) OTHER than price.

What are the non price determinants?
B
– number of buyers
R
– price of related goods (substitutes
or complements)
I
– Income
T
– tastes and preferences
E
– buyer expectations
The entire demand curve shifts
Shift to the left = decrease
The entire demand curve shifts
Shift to the right = increase
ELASTICITY OF
DEMAND
Key Terms
Elasticity
of demand: a measure of
how consumers respond to price
changes
Elastic
demand: describes demand
that is very sensitive to a change in
price
Inelastic
demand: describes demand
that is not very sensitive to price
changes
Consumer Response

Elasticity of demand – how consumers
respond to price changes; it measures
how drastically buyers will cut back
or increase their demand for a good
when the price rises or falls.
 Your
demand for a good that you
will keep buying despite a price
change is inelastic.
 If
you buy much less of a good after
a small price increase, your
demand for that good is elastic.
Elastic Demand
Comes from one or more of these
factors:
1. The availability of substitute
goods (S)
2. Percentage of your income
that a good or service
requires (I)
3. If the good or service is a
necessity or a luxury (N)
Measuring Elasticity
 What
is the
homeowner’s
elasticity of
demand for
gasoline?
 What factor
affected
elasticity?
Factors Affecting Elasticity
Is there a Substitute?
 If there are a few
substitutes for a good,
then even when its price
rises greatly, you might
still buy it.
 If the lack of substitutes
can make demand
inelastic, a wide choice of
substitute goods can make
demand elastic.
What percentage of income
is the good or service?
how
much of your budget
you spend on a good.
Spend
alot = Elastic
Spend a little = Inelastic
Is the good a necessities or a
luxury?
Is the good necessary for
survival?
Total Revenue
Elasticity is important to the study of
economics because elasticity helps us
measure how consumers respond to price
changes for different products.
The elasticity of
demand
determines how
a change in
price will affect
a firm’s total
revenue or
income.
TOTAL REVENUE
 THE
QUANTITY OF GOODS AND
SERVICES THAT A FIRM SELLS
MULTIPLIED BY THE PRICE OF EACH
G/S.
 1000
Birdhouses X $4 = $4000
revenue
 Increase
price = revenue goes up
 Decrease
price = revenue goes down
Checkpoint: Why does a firm need to know
whether demand for its product is elastic or
inelastic?

Knowledge of how the elasticity of demand can
affect a firm’s total revenues helps the firm make
pricing decisions that lead to the greatest revenue.
If
a firm knows that the demand for its
product is inelastic at its current price, it
knows that an increase in price will increase
total revenue.
If a firm knows that the demand for its
product is elastic at the current price, it
knows that an increase in price would reduce
total revenue. WHY? Because there is a
substitute…..