Download Demand - SharpSchool

Chapter 4 Demand
Section 1
Understanding Demand
Demand
• The desire to own something, the ability to
pay for it, and the willingness to purchase it.
• Each individual point on a demand curve is a
quantity demanded. The whole curve is
Price
Demand
Quantity
Changes in Quantity Demanded
• We hold all other factors affecting your
buying habits constant (Ceteris paribus).
• We then look at how consumers react to
changes in prices.
• This is shown graphically by a
movement along the curve to a different
quantity.
The Law of Demand
• The Law of Demand says that:
– when a good’s price is lower,
consumers will buy larger
quantities.
– when a good’s price is higher,
consumers will buy smaller
quantities.
Increase in Quantity Demanded
$3.00
$2.50
Price
.
$2.00
.
$1.50
$1.00
$.50
1
2
3
4
5
6
Decrease in Quantity Demanded
$3.00
$2.50
Price
.
$2.00
.
$1.50
$1.00
$.50
1
2
3
4
5
6
The Law of Demand
As prices go
down…….
Quantity
demanded goes
up.
The Law of Demand
As prices go
up…….
Quantity
demanded goes
down.
Law of Demand Explained
• Law of Demand is a result of two
behavior patterns:
– The substitution effect
– The income effect
The Substitution Effect
• Consumers react to an increase in a
good’s price by consuming less
quantities of that good and more of
other goods.
• Example: As the price of beef goes
up, people will purchase more
chicken.
The Income Effect
• The change in consumption
resulting from a change in
purchasing power.
• Higher price decrease our
purchasing power, decreasing the
quantities that we buy.
• Example: $2.50 a gallon gas
compared to $3.50 a gallon gas
Demand Schedules
• A table that lists the quantity of a
good consumers will buy at each
and every price in the market.
Individual versus Market
Demand Schedules
• chart that lists the quantity of a
good an individual consumer will
buy
• chart that lists the quantity of a
good all consumers in a market
will buy.
Example of a Demand Schedule
Demand Schedules for Pizza
Individual Demand Schedule
Market Demand Schedule
Price per
slice
Quantity
Demanded per
day
Price per
slice
Quantity
Demanded per
day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100
50
Example of a Demand Schedule
Demand Schedules for Pizza
Individual Demand Schedule
Market Demand Schedule
Price per
slice
Quantity
Demanded per
day
Price per
slice
Quantity
Demanded per
day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
300
250
200
150
100
50
Demand Curves
• A graphical representation of the
demand schedule.
• Each price is plotted on the vertical
axis and each quantity is plotted on
the horizontal axis.
Individual Demand Curve for Pizza
Price
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
0
1
2
3
Quantity
4
5
Market Demand Curve for Pizza
Price
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
0
50
100
150
Quantity
200
250
300
Facts about a Demand Curve
• Shows the relationship between the
price of the good and the quantity a
person will purchase of that good.
• The curve slopes downward to the
right. (Inverse relationship)
• Assumes other factors remain constant.
(quality of the good, consumer
incomes, prices of other goods)
Section 1 Assignment
• Ch. 4 Demand Section 1 Questions
– Key Concept Questions pp. 79, 80, 81, 82, and 83
– Section Review Question p. 83 #6
Chapter 4 Demand
Section 2
Shifts of the Demand Curve
Changes in Demand
• We allow factors other than price
to change (no Ceteris paribus).
• Consumers buy a different quantity
than before at all prices.
• This is shown graphically by a
shift of the demand curve to a new
position.
$3.00
Increase in Demand
$2.50
Price
. .
$2.00
$1.50
$1.00
$.50
1
2
3
4
5
6
$3.00
Decrease in Demand
$2.50
Price
$2.00
. .
$1.50
$1.00
$.50
1
2
3
4
5
6
What Causes a Shift?
• When a factor other than price
changes, the demand curve will
shift.
• Changes in these “non-price
determinants” of demand create a
new level of demand at all prices.
“TIMER”
•
•
•
•
•
Taste of consumers
Income of consumers
Market size (number of consumers)
Expectations of future prices
Related good prices
Taste and Preference of Consumers
(Direct for all goods)
As consumer taste
increases……..
Demand for a good
will increase.
Taste and Preference of Consumers
(Direct for all goods)
As consumer taste
decreases……..
Demand for a good
will decrease.
Income of Consumers
(Direct for normal goods)
As consumer
income
increases……..
Demand for
normal goods
will increase.
Income of Consumers
(Direct for normal goods)
As consumer
income
decreases……..
Demand for
normal goods
will decrease.
Income of Consumers
(Indirect for inferior)
Demand for
inferior goods
will decrease.
As consumer
income
increases……..
Income of Consumers
(Indirect for inferior)
As consumer
income
decreases……..
Demand for
inferior goods
will increase.
Market size (Direct)
As market size
increases……..
Demand for the
good will
increase.
Market size (Direct)
As market size
decreases……..
Demand for the
good will
decrease.
Expectations of Consumers
(Direct)
If consumers
expect prices to
increase……..
Demand for the
good will
increase now.
Expectations of Consumers (Direct)
If consumers
expect prices to
decrease……..
Demand for the
good will
decrease.
Related Good Prices
(Direct for substitutes)
Butter/Margarine
If the price of a
substitute good
increases……..
Demand for the
original good
will increase.
Related Good Prices
(Direct for substitutes)
Butter/Margarine
If the price of a
substitute good
decreases……..
Demand for the
original good
will decrease.
Related Good Prices
(Indirect for complements)
Hot Dogs/Buns
If the price of
complementary
good
increases……..
Demand for the
original good
will decrease.
Related Good Prices
(Indirect for complements)
Hot Dogs/Buns
If the price of
complementary
good
decreases……..
Demand for the
original good
will increase.
Chapter 4 Demand
Section 3
Elasticity of Demand
Section 3 Objectives
• Explain how to calculate elasticity
of demand.
• Identify factors that affect
elasticity.
Elasticity of Demand
• A measure of how drastically
buyers will increase or decrease
their quantity demanded of a good
when the price rises or falls.
Inelastic Demand
• Consumers are not very sensitive
to price changes and do not adjust
their quantities demanded by very
much.
• Examples: Medicine, gasoline,
cigarettes, electricity.
Elastic Demand
• Consumers are highly sensitive to
price changes and adjust their
quantities demanded by a large
amount.
Calculating Demand Elasticity
Original – New
Percentage Change =
Original
X 100
Elasticity of Demand
$3.00
$2.50
Price
.
$2.00
.
$1.50
$1.00
$.50
1
2
3
4
5
6
Calculating Demand Elasticity
• Elasticity is determined using the
following formula:
Elasticity = Percentage change in quantity demanded
Percentage change in price
Values of Elasticity
• If elasticity of demand is < 1,
demand is inelastic.
• If elasticity of demand is > 1,
demand is elastic.
Factors Affecting Elasticity
• Availability of substitutes goods.
• % of budget spent on good.
• Perception of good as a luxury or
necessity.