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```DEMAND
QuickTime™ and a
decompressor
are needed to see this picture.
Demand

Market


All people interested in buying or selling a
particular good or service.
Price directed market economy.

Interactions drive the market economy.
Demand and the Price Effect

Demand:


The quantities of a particular good or service
consumers are willing and able to buy at different
possible prices at a particular time.
LAW OF DEMAND (or Price Effect):


Demand decreases as the price of that good rises and
increases as price falls.
Ex: Products T-shirts, hamburgers, ice cream, and CD’s

Price of hamburgers at
soars to \$10
 What do expect would happen?
Quic kTime™ and a
dec ompres sor
are needed to see this picture.
GRAPH:

Price per gallon
\$3.00
\$2.50
\$2.00
\$1.50
\$1.00
\$0.50
Gallons per Week
5
10
15
20
25
30
All possible prices and amounts are
“Jared’s” demand for gasoline.


As P
As P


D
D
A line connecting these points creates a
demand curve… NOT a single point.
**DEMAND Curve slopes DOWNWARD to the
right.
What this looks like:
PRICE EFFECTS are explained
by 4 factors:
Why do prices have this effect?



2. Diminishing Personal Value


Using gas to drive to school is more important than driving to the
store for one box of cereal.
3. Diminishing Marginal Utility


As the price for gas goes down people can buy more.
Enjoyment of driving decreases w/ every mile no matter how low
cost of gas.
4. Substitutes

A good or service that can replace another good or service.
 Ex: High Price…
Walk, Car Pool, Bus
Market Demand

Sum of all individual demands in a given
market at a particular time.


Demand for a variety of people varies widely.
Despite these differences the price effect still
applies to each person.

All demand fewer gallons of gas at higher prices.
NON-Price Determinants of Demand:
What would cause demand to increase or decrease?


1. Income
2. Tastes



3. Price of Related Goods
 Substitute goods: used in place of each other
 Complimentary goods: used together
4. Expectations


When preference for a particular good increases the demand will
increase.
 Ex: Clothes
What people think may happen in the future to prices or their
income

Market demand consists of the sum of the demand for all
THE PRICE ELASTICITY OF
DEMAND

All demand curves for products slope
down—shapes and steepness can be very
different

Price Elasticity of Demand

Measure of how responsive consumers are to
changes in price.
Relatively Inelastic (Rigid)




1. Quantity demanded is NOT affected very
much by price changes.
2. Not very sensitive to price changes.
3. Not many substitutes, short period of time to
consider and small proportion of ones budget.
4. Change in quantity is not as great as the
change in price.

Ex: Necessities (Insulin for a diabetic)
Relatively Elastic (Flat graph):




1. Quantity demanded is affected very
much by price changes
2. Very sensitive to price changes
3. Many substitutes, long period of time to
consider and large portion or ones budget.
4. Change in quantity is greater than
change in price.

Ex: Luxury (vacation, steak)
Elasticity and Total Revenue:

by sellers of a good.

TR = P x Q
Elastic
P
Q and TR
P
Q and TR
• People are willing to buy
non-necessities at low prices.
P
P
Inelastic
Q and TR
Q and TR
• People will purchase the same
amount no matter what the cost.
```
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