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Chapter 3 Demand.

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Presentation on theme: "Chapter 3 Demand."— Presentation transcript:

1 Chapter 3 Demand

2 Section 1-Understanding Demand
Demand – willingness to purchase a specific item at a given price. Demand can be an ethical issue (i.e., sale of kidneys) Law of Demand – as the price of an item rises, the quantity demanded drops, and vice versa.

3 How to read a demand curve
A demand curve is a graphic representation of a demand schedule (a table that lists the quantity of a good that a person will purchase at each price in a market) The graphs shows only the relationship between the price (Y-axis) of a good and the quantity (x-axis) someone is willing to purchase. There is an inverse relationship between price and quantity demanded. If P is up, QD is down; if P is down,QD is up. All demand curves are downward sloping to the right (remember the 2 “D’s” go together).

4 Demand (continued) Diminishing Marginal Utility?
A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility (satisfaction) that person derives from consuming each additional unit of that product. It explains why there is a negative slope of the demand curve.

5 The Law of Demand is the result of two (2) separate behavior patterns and explains why consumers change their spending patterns 1) The Substitution Effect – consumers react to an increase in a good’s price by consuming less of it and more of substitutes that are less expensive Example: Jiffy peanut butter price ↑ Consumption of substitute increases ↑ 2) The Income Effect – consumers consume more or less based on their real income (real income is adjusted for inflation which reflects real purchasing power) Consumption of Jiffy and other goods ↓

6 Section 2–Change in Quantity Demanded
Caused by a change in price Results in movement along the existing demand curve A B Changed the price from $1.00 to $1.50 Change the quantity demanded from 4 to 2 items Moved from point B to point A

7 Section 2–Shifts of the Demand Curve
A demand curve is accurate only as long as there are no changes other than price that could affect the consumer’s decision (ceteris paribus) A shift of the demand curve is caused by a change in something other than the price (determinants) Results in movement of the entire curve Rightward shift represents an increase (D1 to D2) Leftward shift represents a decrease (D1 to D3) P D2 D1 D3 Q

8 T-R-I-B-E-(tastes and preferences, related goods, income, # of buyers, expectations)
Increase in Demand Increase in income (I) Increase in the number of buyers (B) Decrease in availability of substitutes/Increase in the price of substitutes/decrease in price of complements (R) A new fad (T) (taste/preference) Consumer expectations(E) (expect prices to rise) Decrease in Demand Decrease in income Decrease in the number of buyers Increase in the availability of substitutes/decrease in price of substitutes/increase in price of complements Something is no longer in style Consumer expectations (expect prices to fall)

9 Related goods Substitutes-goods used in place of one another.
Example: Jiffy peanut butter price ↑ Consumption of substitute increases ↑ Complements-two goods bought and used together Complement Example: Ski boots price ↑ Purchase of skis ↓

10 Normal vs. Inferior Goods
Normal good – a good that consumers demand MORE of when their incomes increase (e.g., steak) Inferior good – a good that consumers demand LESS of when their incomes increase (e.g. macaroni and cheese)

11 Section 3 – Elasticity of Demand
Elasticity of Demand (Responsiveness to a Price Change)– if I change the price of an item, what kind of an effect will it have on the quantity demanded Elastic Flat Steep P P Notice how flat this ELASTIC curve is. The price will have a lot of effect on the demand Notice how steep this INELASTIC curve is. The price will not have a lot of effect on the demand D Q Q Elastic

12 Factors Affecting Elasticity
Responsive to a Price Change Has substitutes Luxuries Large % of budget Can postpone purchase Not in style Inelastic Unresponsive to a Price Change No good substitutes Necessities Small % of budget Cannot postpone purchase Fads

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