Download Law of Demand - MsDozierSocialStudies

Students will explain how the Law of
Demand, prices, and profit work to
determine production and distribution
in an economy

Law of demand- consumers will buy more of a good when
the price decreases and less when the price increases.
1. How is demand determined?
a. The substitution effect- consumers react to
a price increase in a product by finding a cheaper
product to replace it with.
b. The income effect- a person will change
their consumption of a good or service as a
result of a change in income.

Demand schedule- is a table that lists the quantity of a good
you will buy at each different price.
Demand Schedules
Individual Demand Schedule
Price of a
slice of pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00

Quantity demanded
per day
5
4
3
2
1
0
Market Demand Schedule
Price of a
slice of pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity demanded
per day
300
250
200
150
100
50
A market demand schedule- lists the quantity of a good all
consumers in a market will buy at each different price.

Demand Curveslopes downward
to indicate
consumer demand
at certain prices
Price per slice (in dollars)
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
Demand
.50
0
0
50
100 150 200 250 300 350
Slices of pizza per day


1. Income- Change in income affects demand of goods, as a
consumers income increases they demand more, as it
decreases they demand less goods.
Examples- Luxury Cars/Electronics/Take Out
2. Consumer Expectation- if consumers believe a good will
increase or decrease, demand will be effected.
Examples- Gas Prices after Hurricane IKE/Toys

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
3. Change in population- changes in the size of a population
will affect the demand for a good.
Example- Food/Housing/Medication
4. Consumer Tastes/Advertising- advertising determines
trends and affects the demand for goods
Examples- Toys/Clothing/Music
5. Price of Related Goods- the demand for one good is
affected by the demand for another good. (Complements)Hamburgers and Hamburger Buns (July 4th)

Elasticity of Demand- is the measure of how consumers will
react to a change in price.
1. Inelastic Demand- A decrease in price will lead to only
a small change in demand, or no change at all. Also can
be your personal choice that makes something inelastic.
Example- Food/Gas
2. Elastic Demand- a small change in price leads to a
large change in demand
Example- Luxury Goods
1. Availability of Substitutes- If there are few substitutes for a
good, then demand will not likely decrease as price
increases. The opposite is also usually true.
Examples- Home cooked Buffalo Wings vs.
American Deli Wings
2. Relative Importance- how much of your budget you spend
on the good.
Examples- Dinner out/ Gym.
3. Necessities versus Luxuries- Whether a person
considers a good to be a necessity or a luxury has a great
impact on the good’s elasticity of demand for that person.
Examples- Plasma T.V.
4. Change over Time- Demand sometimes becomes more
elastic over time because people can eventually find
substitutes.
Examples- Touch phones/Mp3 players/
Elasticity of Demand can hurt a firms
income.

Impact- If they make a product that has
elasticity. Then raising the price will cause
their income to fall.



How do supply and demand create balance in
the marketplace?
What are differences between a market in
equilibrium and a market in disequilibrium?
What are the effects of price ceilings and
price floors?
Equilibrium- when the quantity supplied and
demand come together. (Market Clearing Price)
Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
$3.50
$2.50
$2.00
Equilibrium
Price
$1.50
$1.00
$.50
Supply
0
50
a
Equilibrium
Quantity
Price per slice
$3.00
Demand
100 150 200 250 300
Slices of pizza per day
Price of
a slice
of pizza
Quantity
demanded
Quantity
supplied
$ .50
300
100
$1.00
250
150
$1.50
200
200
$2.00
150
250
$2.50
100
300
$3.00
50
350
350
Result
Shortage from
excess demand
Equilibrium
Surplus from
excess supply


Disequilibrium- if the price or supply of the good is anywhere
but at equilibrium.
What causes disequilibrium?
1. SURPLUS- there is more supplied than demanded,
sellers HAVE to cut prices to sell products
2. SHORTAGE- consumers demand more than what is
supplied
Buyers and Sellers will force the market to return to
equilibrium


Price Ceiling- the maximum you can legally charge for a product. Problem
is that it causes shortages for the product. It is always below the market
equilibrium price. CAUSES SHORTAGES
Examples
1. Rent Control
Price Floor- the minimum price set for a good by the government. This is
always higher than the market equilibrium price. Problem is that buyers
don’t buy at the new price, while suppliers are willing to supply more at
the new price. CAUSES SURPLUS
Examples
1. Minimum Wage
Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
$3.50
$2.50
$2.00
Equilibrium
Price
$1.50
$1.00
$.50
Supply
0
50
a
Equilibrium
Quantity
Price per slice
$3.00
Demand
100 150 200 250 300
Slices of pizza per day
Price of
a slice
of pizza
Quantity
demanded
Quantity
supplied
$ .50
300
100
$1.00
250
150
$1.50
200
200
$2.00
150
250
$2.50
100
300
$3.00
50
350
350
Result
Shortage from
excess demand
Equilibrium
Surplus from
excess supply
1. Prices are Signals- communicates to both buyers and sellers
whether goods or services are scarce or easily available.
Prices can encourage or discourage production.
2. Signals for Suppliers- High Price= MAKE MORE (GO)
Low Price= MAKE LESS (STOP)
3. Signals for Buyers- High price= DON’T BUY (STOP).
Low Prices=BUY (GO)
4. Flexibility- Prices can be easily increased or decreased to
solve problems of excess supply or excess demand.