What is Demand? The desire to own something & the ability to pay for it Represents whole range of quantities
The Law of Demand Consumers will buy more of a good when its price is lower Consumers will buy less of a good when its price is higher Quantity demanded is higher at lower prices & vice versa Inverse Relationship
Representing Demand Demand ScheduleDemand Curve List/table showing how much of a product would be purchased at specific prices Graphic illustration showing the relationship b/t price & quantity demanded at ALL prices Shows every possible price/Q D combination
*Demand schedules are used to create demand curves (more informative)
The Substitution Effect When prices change (decrease/increase), consumers will change the mix of products that they buy As the price of a product goes up… Buy other goods to replace THAT product As the price of a product goes down… Buy THAT product to replace other goods
Substitute & Complementary Goods SubstituteComplementary Products that can replace each other Butter & Margarine Taxis & Buses Beef & Chicken Products that are used together Peanut Butter & Jelly Ketchup & Mustard Cars & Car Washes I-pods & I-Tunes
Name 3 goods that could be complements to hamburgers. Name 3 goods that could be substitutes for movie tickets.
The Substitution Effect at Work Price of product Buy MORE substitute goods Buy LESS complementary goods Price of product Buy LESS substitute goods Buy MORE complementary goods
Income Affects What You Buy Normal GoodsInferior Goods Things that you have always liked & bought regardless of income Consumers will demand more normal goods as their income increases Things that you buy only b/c you were unable to afford something else Consumers will demand less inferior goods as their income increases
The Income Effect The change in consumption that results when a price increase causes real income to decline Increasing/Decreasing prices changes the buying power of income Income stays the same
The higher the price of pizza, the fewer slices people will buy Eating salad or tacos instead of pizza when the price of pizza increases Buying fewer slices of pizza when rising prices reduce real income Table that lists quantities of a good that a person will buy at each price Goods that you will always buy regardless of your income Graphical representation of a demand schedule for the entire market
Ceteris Paribus Latin phrase, all other things held constant Demand schedules & curves are accurate taking into consideration price ONLY
Changes in Demand Sometimes increases/decreases in demand arent connected to price When ceteris paribus is dropped, we allow other factors to change
Determinants of Demand Income Population Demographics Consumer Tastes & Advertising Prices of Related Goods Consumer Expectations
CHANGE IN QUANTITY DEMANDED CHANGE IN DEMAND Change in the amount of a product at specific prices Only brought on by a change in price Movement along the demand curve At every price, consumers demand a different quantity than before Caused by ALL factors other than price Shifts entire demand curve to the left or right
Graphing the Changes ( ) CHANGE IN QUANTITY DEMANDED CHANGE IN DEMAND
Shift R IGHT R ise ( Increase in Demand ) Shift L EFT L oss ( Decrease in Demand )
Factors That Influence Demand Determinants of Demand
Income As income increases… Buy more normal goods Buy less inferior goods (if any at all) As income decreases… Buy less normal goods Buy more inferior goods How do these changes affect the demand curve?
Consumer Expectations Current demand for a good is positively related to its expected future price If you expect prices to Buy now If you expect prices to Buy later
How would the demand curve for these items be affected in the event of a natural disaster warning?
Population Population changes have a strong effect on certain goods Example: U.S. Baby Boom Baby clothes, food, books on baby care Housing Schools & Colleges Retirement plans, medical care, RVs
Demographics Statistical characteristics of populations Age, race, gender, occupation, income level, etc. As the purchasing power of groups grow… Firms devote more resources to meeting their demands
Consumer Tastes & Advertising Social trends, advertising, & the influence of the media affect demand Companies spend $ on advertising in hopes of increasing demand Conspicuous Consumption Keeping up with the Jones
Prices of Related Goods The demand curve for one good can also shift in response to a change in demand for another good As product prices Buy more substitute goods Buy less complementary goods As product prices Buy less substitute goods Buy more complementary goods
Why would McDonalds or any other business offer free promotions to customers?
The Demand Curve & Life The Demand Curve is simply a reflection of what makes us happy The happier something makes us, the more we would be willing to exchange for it Higher demand
Utility There is no obvious measure of happiness Goosebumps, smiles, giggles, satisfaction points Economists measure happiness in terms of utility Measured in utils
Subjectivity Utility is subjective & the result of personal tastes & preferences Some people like sushi, some people like fish cooked Some people like to shoot animals with cameras, others prefer rifles
Consumer Satisfaction Utility Satisfaction from consuming a product Marginal Utility the amount of satisfaction from 1 more unit of a product Diminishing Marginal Utility Idea that as additional units of a product are consumed during a given period of time, the additional satisfaction decreases
Marginal Utility A dollar will get you either 1 can of soup or a can of soda The Average American purchases 19 cans of soda & only 1 can of soup per week The marginal utility for a typical consumer for refrigerators starts high & plummets after a quantity of 1 This is why there arent buy- one-get-one free sales marginal utility doesnt warrant the promotion
Diminishing Marginal Utility Each additional unit of a good or service consumed provides less happiness ( fewer utils ) Negative slope The height of the curve indicates the most that consumers would be willing to pay for 1 more unit of a product
Diminishing Marginal Utility Consider This: The average U.S. citizen consumes 49.2 gallons of soft drinks 67 lbs. of poultry 12,406 kilowatt-hours of electricity But have you ever heard of anyone with more than 1 subscription to the same newspaper? Unless you love paper mâché or own a new puppythe marginal utility of a 2 nd newspaper is miniscule
Elasticity of Demand The Effect of Price Changes
Elasticity of Demand Measures how much buyers will cut back/increase demand when prices change Are there products you would continue to buy, even if the price were to change drastically?
Defining Elasticity ELASTICINELASTIC Demand sensitive (responsive) to price changes Ex.) If you would buy less of a good after a small price increase Demand that is NOT sensitive (responsive) to price changes Ex.) If you would buy the same amount (or just a little less) after a large price increase
Elastic Demand Demand is sensitive to price changes Substitutes are available Seen as a luxury Substitutes can be found long term Inelastic Demand Demand is NOT sensitive to price changes Substitutes are NOT readily available Seen as a necessity No time to react to price changes in the short term PROM
Calculating Elasticity Percentage Change in Quantity Demanded Percentage Change in Price DIVIDED BY
Interpreting the Results The Law of Demand implies that the result will always be negative An increase in the price should decrease the quantity demanded & vice versa Less than 1 = Inelastic Keep buying regardless of price More than 1= Elastic Price affects buying
Unitary Elastic unitary elastic If elasticity is exactly equal to 1, then it is unitary elastic Ex.) Suppose the elasticity for a magazine at $2 is unitary When the price rises by 50% to $3, exactly ½ as many copies will be sold as before
Relative Importance Depending on how much of your budget you spend on a good, a price increase will make you prioritize your budget Housing Colored Pencils
Necessity vs. Luxury Necessity Good people will always buy, even when the price increases Luxury Item that can be reduced/removed from a budget when its price increases
Change Over Time Demand sometimes becomes more elastic over time Inelastic in the short term People can eventually find substitutes that allow adjustments to what they buy
Elastic DemandInelastic Demand Demand Sensitive Substitutes available More of income spent on good Seen as a luxury Substitutes can be found in the long term Demand NOT sensitive Substitutes NOT available Less of income spent on good Seen as a necessity No time to react in the short term
Elasticity & Total Revenue The elasticity of demand determines how a change in price will affect a firms total revenue AKA income Total Revenue= Price x Quantity Sold
Elasticity & Total Revenue Elastic DemandInelastic Demand As the price is lowered, total revenue rises As the price is raised, total revenue falls As the price is lowered, total revenue falls As the price is raised, total revenue rises Knowing whether a firms product demand is elastic or inelastic is helpful in making wise pricing decisions & estimating revenue
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