Download Demand

Law of Demand
Marketplace
• Marketplace
• Consumers influence price of
goods
• Demand is how people decide
what to buy at what price
• Supply is how sellers decide how
much to sell at what price
• Marketplace represents the
actions between buyers & sellers
• Give examples of marketplaces
where buyers & sellers meet in our
society.
Voluntary Exchange
• Seller sets the price
• Buyers agree to the product
& price through the act of
buying the products…called
“dollar votes”
• Supply/demand analysis is a
model of how buyers &
sellers behave in the
marketplace
• What happens if buyers
don’t purchase the product?
Nature of demand:
consumer side of economics
• Demand—amount of goods/services that a consumer is willing and
able to buy @ various prices during a given time period
• Quantity demanded—amount of goods/services that a consumer is
willing and able to buy @ each particular price during a given time
period
1. factors of purchase change over time
2. must want it and have means to buy it
Law of Demand
• increase in goods prices causes a decrease in quantity
demanded, and decrease in prices causes an increase
in quantity demanded
• inverse relationship between price and quantity
demanded.
3 Concepts to explain the law of demand:
(1) Income effect
• Income Effect—any increase or decrease in the consumer’s
purchasing power caused by a change in the price.
• Usually occurs by someone on fixed income
• Purchasing power—amount of money people have available to
spend on goods/services
• Increasing purchasing power leads to increase in quantity
demanded…also works in reverse
• Does make consumers more ABLE to buy, but not necessarily
more WILLING.
• Example:
• You have a $30 allowance and store lowers price of CDs from
$15 to $10.
3 Concepts to explain the law of demand:
(2) Substitution Effect
• Substitution Effect—describes the tendency of
consumers to substitute a similar, lower-priced product
for another that is relatively more expensive
1. increase in price of beef will decrease the quantity
demanded for beef and increase the quantity
demanded for chicken
2. some goods/services can’t be substituted (milk,
gas, salt)
3 Concepts to explain the law of demand:
(3) Diminishing Marginal Utility
• Diminishing Marginal Utility—as more units of a product
are consumed, the satisfaction received from consuming
each additional unit declines
1. utility—satisfaction received from a
product/service
2. explains why demand for a product is not
limitless.
• What are examples of diminishing marginal utility in
practice? Can this explain the high divorce rate in our
country?
Demand Curves & Schedules
• Demand Schedules—a table that
shows the level of demand for a
particular item @ various prices
• easy to read table
• Demand Curves—a graphic
representation of a demand
schedule showing relationships
between price and Qty.
demanded during a specific time
period
• always a down sloping curve
or line, from upper right to
lower left of graph
Changes in Demand
• Shift in Qty. demanded—moves
along the demand curve only
• the only cause is a change in
price
• Shift in demand—demand curve
moves left (not up or down) when
demand falls at all possible prices;
demand curve shifts right when
demand rises @ all possible prices
Changes in overall Demand:
Determinants of Demand
• consumer tastes & preferences (ex. Bands, clothes, cars)
• market size--# of consumers entering or leaving markets
• ex. Advertising, negative press, China, boycotts, gov’t
embargoes, new technology (new products)
• price of related goods—changes in a products price can affect
demand of products’ related goods
• substitute goods—goods that can be used to replace the
purchase of similar goods when prices rise
• ex. Butter for margarine; turkey for ham
• increase in price leads to an increase in demand for
substitute goods
• complementary goods—goods commonly used with other goods
• ex. Milk-----oreos, cereal, donuts
• computers-----monitors, mice, software
Changes in overall Demand:
Determinants of Demand
• consumer expectations—changing what you buy based
on the expectations that the price will change in the
future or that you income will change in the future
• ex. Gas, houses, cars
• income—as income increases, demand increases; as
income decreases, demand decreases
• exceptions are purchasing a higher quality similar
good instead of a higher quantity of the same good
Complementary v. Substitute Goods
• Complete the Chart Below
Good
Basketball
Laptop
Ipod
Chicken
Concert Ticket
Vase
Couch
Substitute
Complementary
Draw the demand curve below. Add a
demand curve to the right & left labeling
them D2 & D3.
Demand for
Coke
D
Price
Determinants of Demand Exercise
• Now make a list of all 5 determinants of demand.
Indented below each determinant write a scenario that
would increase or decrease the demand for coke. Then
state whether it increased or decreased and which new
curve the demand curve would shift to…D2 or D3.
Reset to D after each scenario.
• You must have at least TWO scenarios that increase &
decrease the demand.
Elasticity of Demand
• the degree to which changes in a good’s price affect the
quantity demanded by consumers; can be elastic or
inelastic
• Elastic Demand—situation in which the quantity
demanded varies greatly to a price change (can change
at any price level: any product could be inelastic for one
price range and elastic for another).
• Product has elastic demand if:
• The product is not a necessity
• Readily available substitutes
• Products cost represents a large portion of a
person’s income
• What are examples of products that have elastic
demand? Give at least 5.
Elasticity of Demand
• Inelastic demand-situation in which the quantity
demanded varies little when the price changes.
• inelastic demand if:
• the product is a necessity (utilities, gas, milk, soap)
• there are few if any readily available substitutes
(gas, soap)
• product’s cost represents a small portion of
person’s income (salt, coffee, candy, sodas, soap,
gas)
• What are some more examples of products that have
an inelastic demand?
Elasticity of Demand
• Elasticity Graphs
• elastic is fairly steeply downward sloping
• inelastic is relatively constant at certain price
Measuring Elasticity
• Total Revenue Test
• total revenue—total income a business receives from selling its
products
• Total Revenue and Elastic Demand
• a drop in a business’s total revenue from a price increase
indicates an elastic demand for the product
• Total Revenue and Inelastic Demand
• a rise in a business’s total revenue because of a price increase
results in an inelastic demand for the product
• Maximizing Total revenue
• measuring the varying elasticity of demand for a product
directs owners toward pricing decisions that will earn the
most revenue