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Chapter 3 Demand. Section 1-Understanding Demand  Demand – willingness to purchase a specific item at a given price. Demand can be an ethical issue (i.e.,

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Presentation on theme: "Chapter 3 Demand. Section 1-Understanding Demand  Demand – willingness to purchase a specific item at a given price. Demand can be an ethical issue (i.e.,"— 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) 1.The graphs shows only the relationship between the price (Y-axis) of a good and the quantity (x-axis) someone is willing to purchase. 2.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 ↑ Example: Jiffy peanut butter price ↑ Consumption of substitute increases ↑ 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) Example: Jiffy peanut butter price ↑ Example: Jiffy peanut butter price ↑ Consumption of Jiffy and other goods ↓ 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  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 A B

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 Q D2D2 D1D1 D3D3

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) (taste/preference)  Consumer expectations(E ) (expect prices to rise) (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) (expect prices to fall)

9 Related goods Substitutes-goods used in place of one another. Example: Jiffy peanut butter price ↑ Consumption of substitute increases ↑ Consumption of substitute increases ↑ Complement Complements-two goods bought and used together 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) 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 P P Q Q D Notice how steep this INELASTIC curve is. The price will not have a lot of effect on the demand Flat Steep Elastic Notice how flat this ELASTIC curve is. The price will have a lot of effect on the demand

12 Factors Affecting Elasticity  Elastic  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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