2What Is the Law of Demand? As Prices go downquantity demanded goes up
3Law of Demand (cont.)As prices go upquantity demanded goes down
4Quantity DemandedThe amount of a good or service that will be purchased at a specific priceQuantity demanded (Qd) – is just a point on the curveOnly price can change the Qd
5Individual Demand Schedule Market Demand Schedule The Demand ScheduleDemand SchedulesIndividual Demand SchedulePrice of a slice of pizzaQuantity demanded per dayMarket Demand SchedulePrice of a slice of pizzaQuantity demanded per day$.50$1.00$1.50$2.00$2.50$3.0054321$.50$1.00$1.50$2.00$2.50$3.0030025020015010050
6Price per slice (in dollars) The Demand CurveMarket Demand Curve3.002.502.001.501.00.5050100150200250300350Slices of pizza per dayPrice per slice (in dollars)When reading a demand curve, assume all outside factors, such as income, are held constant.Demand
7Shifts in DemandCeteris paribus is a Latin phrase economists use meaning “all other things held constant.”When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.
8What Causes a Shift in Demand? Several factors can lead to a change in demand:1. Income – Normal Goods & Inferior Goods2. Population or the number of consumers3. Consumer expectations
94. Consumer tastes & advertising 5. Prices of Related goods Cont.4. Consumer tastes & advertising5. Prices of Related goodsPrice of a substitutePrice of a complement
10What Is Elasticity of Demand? Elasticity of demand is a measure of how consumers react to a change in price.
11InelasticDemand for a good that consumers will continue to buy despite a price increaseConsumers are not very sensitive to an increase in price
12ElasticDemand for a good that is very sensitive to changes in priceA small change in price leads to relatively large change in the Qd
13Calculating Elasticity Elasticity = percentage change in in quantity demanded/ percentage change in priceOr E= % change in Qd/ % change in PPercentage change = original number – new number/ original number x 100
14Values of ElasticityElasticity is< 1 = inelasticElasticity is > 1 = elasticElasticity is “0” = unitary
15Factors Affecting Elasticity 1. Availability of Substitutes2. Relative importance3. Necessities vs. Luxuries4. Change over time