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? 1. Buying Power 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 5. Number of Buyers Market demand consists of the sum of the demand for all individual buyers. 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: TR = Amount paid by buyers and received 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.