Download Ch 4 Demand

Demand
What is Demand?
The Law of Demand
Demand: the desire for an item and the ability to pay for
it
Law of demand: when price of good or service goes up,
quantity demand goes down and vice versa
The Law of Demand
•Price & Demand
▫ Law of demand explains consumer behavior as
well as economic concept
▫ Cheryl decides to spend money on DVDs
 at $15 each, Cheryl demands 3 DVDs
 at $5 each, she demands 7 DVDs
Demand Schedules
▫ Demand schedule—a table lists how much of an
item an individual will buy at each price
▫ Market demand schedule—a table lists how much
of an item all consumers will buy at each price
Demand Curves
▫ Demand curve—a graph that shows amount of an
item a consumer will buy at each price
▫ Market demand curve—amount all consumers will
buy at each price
What is Elasticity of Demand?
Elasticity of Demand
▫ Elasticity of demand measures how responsive
consumers are to price changes
Elastic—quantity demanded changes greatly as price
changes
Inelastic—quantity demanded changes little as price
changes
What Determines Elasticity?
•Substitute Goods or Services
▫ If no substitute for a product, demand tends to be
inelastic ex. gasoline
▫ If there are substitutes for a product, demand tends to
be elastic ex. shoes
•Necessity or Luxury
▫ Necessity—something needed for life,
demand is inelastic ex.
prescription medications
▫ Luxury—something desired but not essential, demand
for luxuries tends to be elastic ex. BMW vs. Ford
What Factors Affect Demand?
▫ Law of diminishing marginal utility: additional benefit of each additional
unit declines as each unit is used
▫ Income effect: amount people buy changes as purchasing
power of their income changes
▫ Substitution effect: amount people buy changes as they
buy substitute products
Change in Quantity Demanded
 change in amount consumers buy because of change
in price
 does not shift the demand curve itself
Change in Demand
▫ Change in demand: caused by a change in the
marketplace. It prompts people to buy different
amounts at every price. Also causes shift in
demand curve
▫ When we shift the demand curve, we assume
 ceteris paribus: everything else is held constant
Change in Income Causes
Shift in Demand Curve
▫ As incomes of most consumers in a market
change, so does total demand
▫ normal goods—demanded more when consumers’
incomes rise
▫ inferior goods—demanded less when consumers’
incomes rise
Change in Population/Market Size
Causes a Change in Demand
▫ Demand for most goods changes as market size
changes
 rise in population leads to increased demand
 decrease in population leads to decreased demand
Consumer Tastes/Advertising Causes a
Change in Demand
▫ Consumer tastes change; products gain and lose
popularity
▫ Consumers demand a greater amount of popular items
at every price
▫ Sellers advertise to create demand for products
Change in Consumer Expectations Cause a
Change in Demand
▫ Expectations about future price of items affect
individual behavior
 expected rise or fall in price can decide whether to
buy now or wait
▫ Expectations of all consumers in a market affect
demand
 Ex. because cars go on sale at end of summer,
demand goes up then
Change in Price of Related Goods Causes a Change in Demand
•Substitutes
▫
products used in place of each other
 if price of substitute drops, people buy it instead of original
item
 if price of original item rises, people will buy substitute
Complements
•goods that are used together
-a rise in demand for one increases the demand for the other
-If price of one product changes, demand for both changes in same
way.
-If price of one rises, demand for both will drop