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Economics Unit 4, Lesson 1 What is Demand? ©2012, TESCCC
Objectives Know the definition of demand.Explain the three conditions for demand. Describe and construct a demand schedule. Construct a demand curve. Explain the law of demand. List and explain the three concepts that explain the law of demand. ©2012, TESCCC
DEMAND – Definition Amount of goods and services a consumer is willing and able to buy at various prices in a given time period ©2012, TESCCC
Conditions for Demand In this definition, we see there are three conditions for demand. 1. Willingness or desire 2. Ability – Financial means 3. Given time period ©2012, TESCCC
Are you willing to buy a Maserati? Do you want one? ©2012, TESCCC
We mean financial ability.Are you able to buy a Maserati? We mean financial ability. ©2012, TESCCC
Specific Time Period Will you buy a Maserati this year? ©2012, TESCCC
All buyers generally behave the same way, so we can make some generalities. ©2012, TESCCC
OR When price increases . . . When price decreases . . .quantity demanded decreases. OR When price decreases . . . quantity demanded increases. ©2012, TESCCC
This is called the law of demand!!!It shows the inverse relationship between price & quantity demanded. P↑ QD↓ P↓ QD↑ ©2012, TESCCC
Demand Schedule Demand schedule – shows quantity demanded at various prices for one consumer Market Demand schedule – shows quantity demanded by all consumers in the market ©2012, TESCCC
Demand Schedule Price Quantity 0.50 1.00 1.50 2.00 2.50 300 250 200150 100 ©2012, TESCCC
Demand Curve You see a demand curve slopes downward, from left to right, showing the inverse relationship between price and quantity demanded. ©2012, TESCCC
P .50 300 Q ©2012, TESCCC
P 2.50 2.00 1.50 1.00 D .50 100 150 200 250 300 Q ©2012, TESCCC
Limitations of Demand CurveThe demand curve is only accurate for one set of conditions. It only shows changes in price. If anything other than price changes then the demand curve will no longer be valid. ©2012, TESCCC
Concepts That Explain the Law of Demand(why the demand curve slopes downward) ©2012, TESCCC
1. The Income Effect The price of an item goes up or down, and it is as if your income has changed; causing the quantity demanded to change. ©2012, TESCCC
2. Substitution Effect If the price of an item changes, especially if it goes up, a consumer will substitute another item that is cheaper. This causes the quantity demanded to change. ©2012, TESCCC
3. Diminishing Marginal UtilityAs each additional unit of a good or service is consumed, the satisfaction received from consuming that good decreases. For example, the first hamburger you eat is great but the second is not as satisfying, so you would not be willing to pay as much for it. The third brings even less satisfaction. ©2012, TESCCC
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