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Demand
Law of Demand
• Demand is an inverse relationship between
the quantity demanded and the price of a
product.
• As price drops, demand increases.
• Example: If the price of something drops,
people will buy more of it.
• This is not a hard and fast rule; there are
execeptions.
What is Demand?
• Demand – quantities of a particular good that
people are willing to buy at different prices at
a particular time.
• If you don’t have the money to buy
something, or don’t want to buy it, you won’t
directly affect demand.
Price Effect
• People buy less at higher prices than t hey do
at lower prices.
• Four things determine price effect:
• 1. buying power
• 2. diminishing personal value
• 3. diminishing marginal utility
• 4. availabilty of substitutes
Buying Power
• You have a given amount of money.
• If price decreases you can buy more of an item
with your money.
• If price increase you can buy less.
• Example: You have $10. If cheeseburgers are
$5 each you can only buy 2. If they are $3
each you can buy 3.
Diminishing Personal Value
• You spend your money on those things that
you value most.
• If you only have a certain amount of money
you will spend it on the things that bring you
the most return.
• Example: If you only have enough money to
fill your gas tank half way, you will only drive
to the places that are most important to you.
No recreational driving!
Diminishing Marginal Utility
• The point at which an additional unit of
something is less satisfying than the one
before it.
• As long as something is bringing you
satisfaction you will buy it. If satisfaction stops
you won’t buy it.
• Example: You buy two slices of pizza. You are
still hungry so you buy a third slice. Now you
are getting full so you don’t buy a fourth slice.
Substitutes
• A good or service that can replace another
good or service,
• Example: Buying a frozen pizza instead of
delivery (cheaper, don’t have to tip the
delivery driver)
• Example: Taking public transportation instead
of driving (save gasoline, parking fees)
Market Demand
• The total of all the individual demands in a
given market at a particular time.
• Example: You and your friends go out for
pizza. You want 3 slices, one friend wants 2
slices, another friend wants 4 slices, and a
fourth friend wants 3 slices. A medium pizza
has 8 slices so you either need to buy a large
or 2 mediums.
Price Elasticity of Demand
• Measures the impact of the price effect.
• If the effect is large then the price is said to be
elastic.
• If the effect is small then it is inelastic.
• Example: The price of a school lunch goes
down and a large number of students buy
lunch. The demand is elastic. If few people
buy lunches at the lower price then demand is
inelastic.
Price Effect and Change in Demand
• Does a change in price cause a change in
demand?
• For demand to change the entire line must
move or shift.
Causes
• Change in income – buying power changes
• Price or availability of substitutes
• Price or availability of complimentary goods –
goods used together – price of gas rises
demand for motor scooters increases.
• Change in weather or season
• Change in number of buyers
• Changes in styles, tastes, and habits
• Change in expectations – predicted change in
price could shift the demand curve. If people
think price of something is going to change
they may hold off buying or buy more and
stock up.