Download Demand Curve

Eco 7/2
The Demand Curve
and Elasticity of
Demand
Graphing the Demand Curve
1. Demand schedule
2. Demand curve
Each shows the law of
demand.
Demand Schedule
• Table of prices and quantity demanded.
Demand Curve
• Plots the numbers of the demand schedule
on a graph. Always a downward slope.
Quantity Demanded vs.
Demand
• Quantity demanded is a specific point
along the demand curve. A change in it
results from change in price.
• Change in demand results in something
other than price. People will buy more or
less at all prices.
Change in demand shifts whole curve left
(less) or right (more).
Determinants of Demand
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Changes in population
Changes in income
Changes in Tastes and Preferences
Substitutes
Complimentary goods
Changes in Population
• When population increases, demand for
TV sets increases (shifts right) at each
price.
Changes in Income
• Demand for goods at all prices decreases
(shifts left) if income decreases.
• Demand for goods at all prices increases
(shifts right) if income increases.
Changes in Tastes and
Preferences
• When an item becomes a fad, more
are sold at every price. Curve
shifts right.
• When no longer popular, curve
shifts left.
Substitutes
• Butter/Margarine- If the price of butter
stays the same and margarine falls, people
will buy more margarine at all prices.
Complementary Goods
• If 2 goods are compliments, a change in the
price of one will affect demand for the
other.
Cameras/film- If price of cameras drops,
demand for film will increase.
Computers/printers- If prices of computers
rises, demand for printers will fall.
Price Elasticity of Demand
• Answers the question: “How
responsive are consumers to an
increase or decrease of price?”
That responsiveness is
ELASTICITY.
Elastic Demand
• For some goods, a rise or fall in price
greatly affects demand. Demand for
these products is called ELASTIC.
• Consumers can be flexible when
buying these items.
Coffee is very elastic. People will shift
from Folgers to Tasters Choice.
Inelastic Demand
• If a price change does NOT result
in a substantial change in quantity
demanded, it’s inelastic.
Pharmaceutical drugs are inelastic.
People will buy them no matter
how much the price is raised.
What Determines Price Elasticity
of Demand?
1. Existence of substitutes- the more
substitutes, the more elastic it is.
(Soft drinks)
2. Percentage of total budget- pepper
is inelastic; housing is elastic.
3. Time to adjust to price changes.
Substitutes
• The more substitutes, the more elastic a
product is. People just switch when price
rises.
Percentage of Total Budget
• If a product costs a • If it costs high
small percentage
percentage of total
of your total
budget, like
budget, like pepper,
housing, it will be
it’s inelastic.
elastic.
Time to Adjust to Prices
• Longer the time span, the greater
the price elasticity of demand.
If cost of electricity skyrockets
tomorrow, it will be inelastic, but
over time, people will adjust their
consumption.