Download The Law of Demand - McEachern High School

The Law of Demand
…and YOUR powers as a
consumer.
Demand


Demand—the desire
to own something
and the ability to pay
for it.
Quantity Demanded—
The amount of a
good or service
people will buy at a
given price, in a
given time period.
The Law of Demand
An
INCREASE in the price of a good or service
causes a DECREASE in the quantity demanded,
and a DECREASE in the price of a good or a
service causes an INCREASE in the quantity
demanded…
There
is an
INVERSE RELATIONSHIP
Between Price and
Quantity Demanded
Demand vs. Quantity Demanded
 The way you determine whether or
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
not you are referring to DEMAND
or QUANTITY DEMANDED is
asking yourself if you are
responding specifically to price. If
the answer is YES then it is a
change in Quantity Demanded.
Example:
1. I start car pooling and buy less
gas because prices are $4 a
gallon.
This is a change in QUANTITY
DEMANDED.
2. I start car pooling because I
believe burning fossil fuels causes
global warming.
This is a change in DEMAND.
In example two my decision had
nothing to do with price.
Which of the following issues
addresses a change in QUANTITY
DEMANDED?
A.) biscuits are on sale, so I buy two extra.
B.) the Gators win the national championship, so I
buy a hat.
C.) I hear that broccoli is healthy, so I start buying
more of it.
Demand Schedule for Stereos
Price per Car
Stereo
 $500
 $400
 $300
 $200
 $100

Quantity
Demanded
 500
 1,000
 1,500
 2,500
 5,000

Demand Curve
P
R
I
C
E
$500
$400
$300
$200
$100
500
1000 1500 2500 5000
Quantity Demanded
Changes in Demand
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What can cause
demand to change?
Price?
NO. A change in
price just causes a
change in the
Quantity Demanded.
To cause a change
in demand, other
things must happen:
1. Diminishing Marginal Utility
 The marginal utility of each unit
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
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LESSENS with each unit.
For example…
$3 for an ice cream cone (your
first) might seem well worth
the money…
Maybe even a second cone
would seem worth another
three bucks…
But for your third? Maybe
$1.50?
Your fourth? What? 75 cents?
A fifth? Would you even take it
for nothing?
The ADDITIONAL
USEFULLNESS diminishes with
each unit consumed.
Examples of Demand-Changes Causes
2. Consumer Tastes—the demand
for poofy haircuts is very low
because they are
UNFASHIONABLE…
…Not because they are
EXPENSIVE.
3. Population Size—when people
begin crowding an area, the
demand for…
…Housing, parking, tables at
restaurants, etc., INCREASES.
4. The income effect—as people
become more wealthy, they buy
more stuff...
…Their demand for luxury cars
might INCREASE, regardless of
high prices.
Which of the following addresses
the "income effect" as it relates to
demand?
A.) a new bus route causes a local movie theater
to increase its sales.
B.) Cobb County teachers take a pay cut, so
fewer of them go on vacation.
C.) it becomes fashionable to wear parachute
pants; sales increase.
When the building of a new
subdivision increases sales for a
local movie theater, the theater has
benefited from the...
A.) population effect.
B.) income effect.
More Examples of Demand Change
5. The Complementary
Effect—if the price of milk
goes up…
…The QUANTITY of milk
DEMANDED will
decrease…
…And the DEMAND for
cereal will also decrease.
6.The Substitute Effect—if
the price of hotdogs
rises…
…The QUANTITY of
hotdogs DEMANDED will
decrease…
…And the DEMAND for
hamburgers will increase.
When the price of pillows rises, the
demand for pillowcases decreases.
This is known as the...
A.) substitution effect.
B.) income effect.
C.) population effect.
D.) complementary effect.
When the price of Pepsi rises, the
demand for Coke increases. This
is known as the...
A.) complementary effect.
B.) substitution effect.
C.) income effect.
D.) population effect.
Demand Change: Consumer Expectations
7. If consumers expect
that prices will FALL
in future…
…current demand will
…DECREASE.
8. If consumers expect
that prices will RISE
in the future…
…current demand
will…
…INCREASE.
Future expectation of high prices
will cause current demand to...
A.) fall
B.) rise
Elasticity of Demand
 Elastic demand occurs when
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a small change in the price of
a good causes a major,
opposite change in the
quantity demanded…
For example…
If movie tickets went up by
three dollars (a small
change)…
It could possibly cause an
enormous change in the
quantity of movie tickets
demanded.
Elastic demand usually
applies to WANTS, rather
than NEEDS.
Inelastic Demand
 Inelastic demand
exists when the
price of a good has
little impact on the
quantity demanded…
 The demand for
bread, milk…what
else?...tends to be
inelastic.
 And inelastic
demand usually
applies to NEEDS,
rather than…?
Elastic or Inelastic DEMAND?
Diapers
A.) elastic
B.) inelastic
Hotdogs
A.) elastic
B.) inelastic
Healthcare
A.) elastic
B.) inelastic
Magazines
A.) elastic
B.) inelastic
Electricity
A.) elastic
B.) inelastic
Gasoline
A.) elastic
B.) inelastic
Chewing gum
A.) elastic
B.) inelastic
Tennis balls
A.) elastic
B.) inelastic