Presentation on theme: "The Economics of Demand"— Presentation transcript:
1 The Economics of Demand CONTEMPORARY ECONOMICS3/31/2017The Economics of DemandThe Demand CurveElasticity of DemandChanges in DemandLESSON 4.1
2 ConsiderDemandWhy are newspapers sold in vending machines that allow you to take more than one copy?How much do you eat when you can eat all you want?What cures ‘spring fever’?What economic principle is behind the saying, “Been there, done that”?Why do higher cigarette taxes cut smoking by teens more than by other age groups?
3 Explain the law of demand Interpret a demand schedule and demand curve ObjectivesThe Demand CurveExplain the law of demandInterpret a demand schedule and demand curve
4 Key Terms The Demand Curve demand law of demand marginal utility law of diminishing marginal utilitydemand curvequantity demandedindividual demandmarket demand
5 DemandDemand indicates how much of a product consumers are both willing and able to buy at each possible price during a given period, other things remaining constant.
6 Law of DemandThe law of demand says that quantity demanded varies inversely with price, other things constant. Thus, the higher the price, the smaller the quantity demanded.
7 Law of Demand Demand, wants, and needs Substitution effect The change in the relative price (the price of one good relative to the prices of other goods) causes the substitution effectIf all prices changed by same margin, there would be no substitution effectIncome effectMoney income – the number of dollars you receive per periodReal income – measure in terms of how many goods and services you can buyDiminishing marginal utilityMarginal utility – additional satisfaction you derive from each itemLaw of marginal utility you derive from each additional item consumed decreases as your consumption increases (example: pizza slices)
8 Demand Schedule and Demand Curve Demand versus quantity demandedIndividual demandMarket demand
9 Demand Schedule a $15 8 b 12 14 c 9 20 d 6 26 e 3 32 Price Quantity Demandedper Pizza per Week (millions)a $15 8b 12 14c 9 20d 6 26e 3 32
10 Demand Curve for Pizza 8 14 20 26 32 Millions of pizzas per week $15 12963Price per pizzaabcdeD
12 Market Demand for Pizzas $1284Price123Pizzas (per week)(d) Market demand for pizzas6dHBCD+=
13 CONTEMPORARY ECONOMICS 3/31/2017ObjectivesElasticity of DemandCompute the elasticity of demand and explain its relevance.Discuss factors that influence elasticity of demand.LESSON 4.1
14 Computing the Elasticity of Demand CONTEMPORARY ECONOMICS3/31/2017Computing the Elasticity of DemandElasticity of demand measures the percentage change in quantity demanded divided by percentage change in price.Elasticity of demand=Percentage change in quantity demandedPercentage change in priceLESSON 4.1
15 Computing Elasticity of Demand Elasticity values>1 it is elasticPercentage change in price will result in larger percentage change in the quantity demanded=1 it is unit-elastic<1 it is inelasticDemand is usually more elastic at higher prices and less elastic with lower pricesElasticity and total revenuePrice x’s quantity demanded at that price
16 The Demand for Pizza 8 14 20 26 32 Millions of pizzas per week $15 12 963Price per pizzaD
17 Determinants of Demand Elasticity Availability of substitutesThe greater the availability of substitutes for a good, the greater the good’s elasticity of demandShare of consumer’s budget spent on the goodIncrease in prices reduced the demand because people are not both willing and able to higher pricesA matter of timeThe longer the adjustment period, the greater the consumer’s ability to substituteSome elasticity estimatesThe elasticity of demand is greater in the long run because consumers have more time to adjust
18 Demand Becomes More Elastic Over Time 507595100Millions of gallons per day$1.251.00Price per gallonDwDmDy
19 Selected Elasticities of Demand ProductShort RunLong RunElectricity (residential)0.11.9Air travel2.4Medical care and hospitalization0.30.9Gasoline0.41.5Movies3.7Natural gas (residential)1.42.1
20 Other Determinants of Demand Consumer IncomeThe prices of related goodsThe number and composition of consumersConsumer expectationsConsumer tastes
21 Changes in Consumer Income If income ↑, consumers willing and able to buy more which ↑ demandDemand curve shifts to the rightTwo categories of goods:Normal goods – demand increases as money income increasesInferior goods – demand decreases as money income increasesExamples: used clothing, bus rides, etc.
22 Changes in the Prices of Related Goods SubstitutesDecrease in price of one item will reduce the demand for a substituteExample: Tacos and PizzaComplementsCertain goods used togetherExample: airline tickets and car rentalsA decrease in the price of one shifts the demand of the other rightward
23 Changes in Prices of Related Goods (cont) Changes in size or composition of the population will increase demand and shift the curve to the rightChanges in consumer expectations can shift the demand curve to the left or the rightChanges in consumer tastesTastes are your likes and dislikes as a consumer
24 Movement along the Curve Movement vs. ShiftA change in price, causes a movement along the demand curve, changes the quantity demandedA change in one of the determinants of demand other than price causes a shift of a demand curve
25 Extensions of Demand Analysis Role of timeYour willingness to pay more for time-saving goods depends on the opportunity cost of your time!