Download Objective—Students will understand the concept of DEMAND in

Objective—Students will
understand the concept of
DEMAND AND SUPPLY and
the law of demand and law of
supply.
DEMAND:
• The quantities of a product
which consumers are willing
and able to purchase at
various prices.
Please note…
• If you add the words “…and able…”
between “…willing…” and “…to buy…”, so
that it reads…”…Willing and able to
buy…”, now you have something called
• Effective Demand.
• (I might be willing to buy a certain car,
but…am I able?)
LAW OF DEMAND:
• As the price of the product (P)
goes down, the quantity (Q) of
the product which consumers
are willing to purchase goes
up, and vice versa.
Or..as a memory aid…
• http://www.youtube.com/watch?v=I_izvAb
hExY&ob=av2e
• OR..in symbols..
Q^
P ^ Q v, P v
• This shows an inverse relationship of P
to Q.
Price Effect
• If the price changes, the law of demand
says that the quantity will change.
• It is NOT a change in demand to have
the quantity change when the price
changes, it is merely a movement along
the curve.
• Why does the demand curve slope
down and to the right? In other
words…why do people tend to buy
more of a product at a lower price?
3 possible reasons for “price effect”
• 1. New Buyer Effect – A lower price lures
new buyers into the market.
• 2. Real Income Effect – At a lower price, it
is as though the consumer has more money
to spend.
• 3. Substitution Effect – At a lower price,
people will substitute the lower priced
product for the higher priced one.
SHIFT FACTORS—the sources of
demand
• The “shift factors” are sometimes called
“determinants of demand”.
• I use a mnemonic of “TIPSCWE”, using
the first letters of …
Taste and Preference
• What people want to buy because of
fashion, style, or custom.
Income
• If people’s incomes increase, they will
buy more of what we call “NORMAL
GOODS”.
• If an increase in income causes a
decrease in demand, we call that
product an “INFERIOR GOOD”.
Population
• more people, more demand.
• Fewer people, less demand.
Substitutes
• prices of a substitute good may affect a
good’s demand.
Complements
• Goods which “go along with” another
good will affect that good’s demand.
Wealth
• A person’s accumulated wealth from past
income, if it changes, can affect one’s
current demand.
Expectations
• If a person expects something to go up in
price, or to go to a shortage situation, they
will buy now.
• And…the opposite if they think it is going
to go down in price, they will wait to
purchase.
Supply.
• is the quantities of the product
that producers are willing and
able to market at various prices
The Law of Supply
• states that as the price of the product
increases, the quantities that producers
are willing to market will also increase.
This shows a direct relationship between
price and quantity.
Price Effect - supply
• A change in price causes a change in
quantity supplied, not a change in supply.
This is known as the Price Effect.
Supply Schedule and Curve
• A supply schedule is a table showing
prices and quantities supplied.
• A supply curve is a graph showing the
data from the supply schedule.
• The supply curve slopes UP and to the
Right.
Shifters…
• Cost of production – in many ways, the
most important shifters.
• Technology related to production
• Number of firms
• Taxes
• Expectations
• But…
Supply shifters
(Determinants of supply)
• A Mnemomic?
• Productivity
Indirect tax
Number of firms
Technology
Subsidies
Weather
Costs of production
• OR…
PASIFIC-an alternate Demand
Shifter memory aid
• Population
Advertising
Substitutes (price of)
Incomes
Fashions and trends
Interest rates
Complements (price of)
Demand Increase- curve shifts to the right
“AT ALL PRICES"
Demand Decrease
• Note: “at all prices”…
Supply Increase…
again..curve moves right
Supply decrease
curve moves left…
Both S and D shift…