2Section 1: Understanding Demand Consumers shape markets through their demands.
3DemandDemand: the desire to own something and ability/willingness to pay for it.Consumer demand dictates what is produced.
4Law of DemandCostDemandCostDemandLaw of demand: when a good’s price is lower, consumers will buy more. When the price is higher, consumers will buy less.
5Substitution EffectSubstitution effect is when consumers react to an increase in price by purchasing more alternative (cheaper) products.If pizza goes up in price, people buy more hamburgers and less pizza.
6Income EffectIncome effect is when consumers demand less because of a change in real income.If all clothing prices rise, and your income does not, you will consume/demand less clothing.
7Price of a slice of pizza Quantity of slices demanded Demand SchedulePrice of a slice of pizzaQuantity of slices demanded$.505$1.004$1.503$2.002$2.501Economists chart demand by creating a demand schedule: a table that lists demand levels at different prices.
8Market Demand Schedule Price of a slice of pizzaQuantity of slices demanded$.505 million$1.004 million$1.503 million$2.002 million$2.501 millionA market demand schedule charts demand levels for an entire economy.
9Demand CurveDemand curves plot the data from demand schedules onto a graph.
10Creating our own demand schedule How much are you willing to pay for an ipad?
11Thinking about demandWhy might the law of demand only apply in a free market economy?What about a centrally planned economy?
12Section 2: Shifts in the Demand Curve Demand Curves can change as the result of many different circumstances.
13Why does demand change?Excluding price, what kind of circumstances, events, or environments might cause demand to shift?
14Why does demand change? Factors that can shift demand… Economic projectionsPopularityWeatherConsumer tasteAdvertisingChanges in income
15Ceteris ParibusCeteris paribus: Latin for, “all other things held constant.”Demand curves take only price into account, holding all other things constant.Many other factors, beside price, affect demand.
16Shifts along the curveShifts along the curve happen as a result of price
17Shifting the curveFactors beyond cost, however, can cause the entire curve to shift (greater or less demand at every price).
18Curve ShiftsThe curve can shift out (right/up) with increased demand at all prices, or back (left/down) with decreased demand.
19Types of goodsNormal goods: goods consumers demand more of when their income increasesInferior goods: goods that consumers demand less of when their income increasesExamples?
20Changes in demand Thousands of simultaneous factors influence demand. Consumer expectations: economic forecasts, perception of value changesPopulations: Baby boomersConsumer tastes and advertising: what is “in”?
21Related Goods Complements: two goods that are used together. Substitutes: goods that are used in place of one another.Examples?
22Section 3: Elasticity of Demand Price changes affect demand for some goods/services more than others.
23Elasticity of demandElasticity measures how consumers react to changes in price.
24Cost/Demand What would you still demand, regardless of price change? What would you quickly stop demanding, with even a small price change?
25Inelastic DemandInelastic demand is relatively unresponsive to a change in price (demand does not stretch).Examples: food, fuel, electric, clothing, healthcare
26Elastic DemandElastic demand is very sensitive to a change in price (demand stretches).Examples: nonessential products
27Demand Curve for Elastic Good An elastic curve is flatter, since demand is more responsive to cost.
28Demand Curve for Inelastic Good An inelastic demand curve is steep, because the demand isn’t as responsive to cost
29Necessities vs. Luxuries Is this good/service a necessity to survive, or a luxury?
30Availability of Substitutes Are there easy, available substitutes for this product?
31How elastic is the demand for… Rank the elasticity for the following things…
32Elasticity and Revenue Price of a slice of pizzaQuantity of slices demandedTotal Revenue$.50300$150$1.00250$250$1.50200$300$2.00150$2.50100$3.0050Total Revenue: amount of money a company receives for selling their goods/services.Revenue is impacted by the elasticity of demand
33Elasticity of RevenueIf demand is elastic, raising the price will decrease total revenue (and vice-versa).If demand is elastic, raising the price will increase total revenue (and vice-versa).Elastic DemandInelastic DemandPriceRevenuePriceRevenue