Download understanding demand - Lemon Bay High School

UNDERSTANDING
DEMAND
In a market system, the
interaction of buyers and sellers
determines the price of most
goods as well as what quantity
of a good will be produced
LAW OF DEMAND

When a good’s prices is lower, consumers
will buy more. When the price is higher,
consumers will buy less

The law of demand is the result of two
separate behavior patterns that explain why an
increase in price decreases the quantity
purchased


Substitution effect
Income effect
SUBSTITUTION EFFECT
As the price of a good rises it becomes
more expensive compared to another
good
 As a result as the price of one good goes
up the consumers become more likely to
buy a another good as a substitute
 Consumers react to a rise in prices of one
good by consuming less of that good and
buying more of another good
 What must be true for this to be right?

INCOME EFFECT
Rising prices make us feel poorer. As
prices increase an individuals budgets just
will not buy as much as it once did
 Individuals can no longer afford to buy the
same combination of goods



When the price goes up the quantity
demanded goes down
Income effect also is true when prices go
down. When prices go down the quantity
demanded goes up