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Understanding Demand! Economics Economic Market • Market: Any place where people come together to buy and sell goods or services • An economic market has two sides: – The buying side is referred to as demand – The selling side is referred to as supply P / Q / Δ / Qd • • • • P = price Q = quantity Δ = change Qd = quantity demanded What is Demand? • Demand: The willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period – Willingness refers to the buyer’s want or desire to buy the good – Ability refers to the buyer having the money to purchase the good What is Demand? • Example • John doesn’t have $450 for a new Iphone. If he did have the money, he would buy it. John has the willingness to buy the I - phone, but does not have the – ability. Law of Demand • Law of Demand: a law stating that as the price of a good increases, the quantity demanded of the good decreases, and that as the price of a good decreases, the quantity of the good increases (inverse relationship). • If P↑ then Q d ↓ • If P↓ then Q d ↑ Law of Demand • When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down people buy more of it, other things being equal. Law of Demand • Example: • If the price of a ring tone decreases, quantity demanded will __________ – increase • If the price for a ring tone increase, quantity demanded will __________ – decrease Quantity Demanded • Quantity Demanded: The number of specific units of a good purchased at a specific price • Example – Angie buys two scoops of ice cream for $3 at her school lunch. The two scoops of ice cream is the quantity demanded at $3 Demand Schedule • The numerical representation of the law of Demand – Notice as the price goes down, the quantity demanded goes – Up – And vice versa Price 5 4 3 2 Quantity Demanded 10 17 36 38 1 53 Price and Quantity Demanded • Why does quantity demanded rise as price falls? – The Law of Diminishing Marginal Utility! • A law stating that as a person consumes additional units of a good, eventually the utility (satisfaction) gained from each additional unit of the good decreases – This is why demand is a curve more than a straight line • Example – You enjoy your first Big Mac more than your second, and you enjoy your second more than your third Demand Curve • The graphical representation of the law of demand • Notice: – Price is always on the vertical axis – Quantity demanded is on the horizontal axis Demand Curve Shift • As demand increases, the curve shifts right • As demand decreases, the curve shifts left What Causes Change in Demand? (demand curve shift) INEPT • Income • Number of Buyers • Expectations of future prices • Prices of Related Goods • Tastes and Preferences What Causes Change in Demand? (demand curve shift) • Income: As income goes up or down, people may buy more or less of a product – Income going up or down, does not mean the demand will change. It depends on the good. – Ex: Food vs. a New Car; House vs. a Vacation Types of Goods • Normal good: – A good for which the demand rises as income rises and demand falls as income falls • Inferior good: – A good for which the demand falls as income rises and demand rises as income falls • Neutral good: – A good for which the demand remains unchanged as income rises or falls What Causes the Demand Curve to Shift? • Number of Buyers: An increase in the number of buyers in a market area results in higher demand – A decrease results in lower demand – How do buyers increase and decrease? What Causes the Demand Curve to Shift? • Expectations of future Price: If buyers think the price of a good will increase or decrease in the future, they will impact demand – Ex: Gas prices, Play Station 3, prom dresses, tickets Will these cost more or less in the future? What Cause the Demand Curve to Shift? • Prices of related goods: • Complement: a good that is consumed jointly with another good. The price of one and the demand for the other move in opposite directions (inverse relationship) • Substitutes: a similar good. The price of one good and the demand for the other move in the same direction (direct relationship) Complements and Substitutes What Causes the Demand Curve to Shift? • Tastes and Preferences: People’s preferences affect how much of a good they buy. – A change in favor of a good moves the curve to the right – A change NOT in favor of the good moves the curve to the left Change in Demand vs. Change in Quantity Demanded D2 D1 • CHANGE IN DEMAND • A change in demand refers to a shift in the demand curve. • This can be brought on by any of the 5 factors Change in Demand vs. Change in Quantity Demanded D1 A B • CHANGE IN QUANTITY DEMANDED • A change in quantity demanded refers to a movement along a given demand curve. • This is only brought on by a change in price What Causes Change in Quantity Demanded? PRICE! Demand Lesson • Video: Demand • Video lesson: Law of Demand