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Demand Section 1 What is demand? It is the desire, ability and willingness to buy a product It is a microeconomic concept, which means: ◦ The part of economics that deals with behavior and decisions making by SMALL units, such as individuals ◦ It helps to explain how prices are determined and decisions are made I want I want I want As consumers we are smarter when we research As investors we are also smarter when we research It is essential to understand how a market economy works ◦ To know what is popular and not so much ◦ What people are charging ◦ Is there a need for the product, etc. ◦ It is important for sound business planning So why should I know before? Where is the demand!!!! The more demand the better You will not start a ski shop in Hawaii States that the quantity of a good or service varies inversely to price So in other words, price and quantity have an opposite relationship So, when price goes up, demand goes down When price goes down, demand goes up Price is an obstacle because it discourages people from buying or doing something High prices are an obstacle Law of demand A demand schedule, is a listing that shows various quantities demanded of a particular product at all possible prices that might prevail in a market at any time It shows what an individual is willing to purchase Most people would buy more of something as the price gets lower Draw One Its time to graph!!! Also a table but reflects how much of a good or a service all consumers are willing and able to buy at each price in the market Market Demand Schedule Demand curve, is the demand schedule shown graphically as a downward sloping line It is a graph showing the quantity demanded at each and every price It is represented as DD The price is the Y or vertical side of the graph The demand for the product is the X or horizontal side The Curve This is a curve that shows the quantities demanded by everyone who is interested in purchasing the product For our purposes in this class the market will be small Shows the data found in a market demand schedule and shows the quantity that all consumers are willing to buy Market Demand Curve Popularity of a product is based on utility, or useful or satisfaction that someone gets from using the product Diminishing marginal utility, the extra satisfaction someone gets from the product starts to diminish or go away We are not likely to purchase some things for a 2nd, 3rd or 4th time Law of Diminishing Marginal Utility When the price of something goes up you buy less of it because you feel poorer This is called the income effect, there is a change in quantity demanded because of a change in price that alters consumers’ income Types of demand changes Well, many people may buy a Bon Jovi CD or song instead of a concert ticket because they can afford that This is called the substitution effect, people substitute a lower priced item for another for instance generic name brands So what is the next option? A change in the amount of a product that consumers will buy because of a change in price Each change in quantity demanded is shown by a new point on the demand curve Change in Quantity Demanded Change in demand causes a shift in the demand curve because people are now willing to buy different amounts of the product at the same price Why the change? Depends, sometimes a change in consumers tastes’, income, price of related goods (substitutes and compliments), consumer expectations and market size The more demanded the shift to the right, less shift to the left Second type of change Bad weather? Terrorist attacks? Changes in Expectations Section 2 Advertising Trends New products Changes in season For example: healthier lifestyle, typewriter versus computer, fuel efficient cars, baseball season What affects the way we purchase? Elasticity of demand, refers to how responsive consumers are to a price changes in a marketplace Do I Buy? Do I need it? Sometimes demand is referred to as being elastic It means a change in price causes a change in the quantity demanded (either up or down) When demand is elastic you can see a relatively large change in demand Ex. Fresh veggies Fat Pants Inelastic means a given change in price causes relatively small changes in demand Ex. Salt, if the price is cut in half people are not going to run out and purchase large amounts of salt and vice versa Other examples, doctors, tobacco, gas, alcohol Inelastic PDA’s go on sale If price goes down 20% and quantity demanded goes up 30% , then the demand is elastic Reason: the percentage change in the quantity demanded is greater than the percentage change in price Test elasticity The change in price and quantity demanded are the same Unit Elastic 1. urgency or need- can the purchase be delayed….is it a luxury or a necessities Example would be insulin 2. adequate substitutes available- if yes the consumer can switch back and forth when prices change 3. does the purchase use large amounts of money? Demand for salt is inelastic b/c a container is less than a $,a car would be different How do we determine a products elasticity? Total revenue is the amount of money a company receives for selling its products Total revenue test- compare total revenue a business would receive when offering its product at various prices Take a Test