# Eco 7/2 The Demand Curve and Elasticity of Demand.

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Eco 7/2 The Demand Curve and Elasticity of Demand

Graphing the Demand Curve 1.Demand schedule 2.Demand curve Each shows the law of demand.

Demand Schedule Table of prices and quantity demanded.

Demand Curve Plots the numbers of the demand schedule on a graph. Always a downward slope.

Quantity Demanded vs. Demand Quantity demanded is a specific point along the demand curve. A change in it results from change in price. Change in demand results in something other than price. People will buy more or less at all prices. Change in demand shifts whole curve left (less) or right (more).

Determinants of Demand Changes in population Changes in income Changes in Tastes and Preferences Substitutes Complimentary goods

Changes in Population When population increases, demand for TV sets increases (shifts right) at each price.

Changes in Income Demand for goods at all prices decreases (shifts left) if income decreases. Demand for goods at all prices increases (shifts right) if income increases.

Changes in Tastes and Preferences When an item becomes a fad, more are sold at every price. Curve shifts right. When no longer popular, curve shifts left.

Substitutes Butter/Margarine- If the price of butter stays the same and margarine falls, people will buy more margarine at all prices.

Complementary Goods If 2 goods are compliments, a change in the price of one will affect demand for the other. Cameras/film- If price of cameras drops, demand for film will increase. Computers/printers- If prices of computers rises, demand for printers will fall.

Price Elasticity of Demand Answers the question: “How responsive are consumers to an increase or decrease of price?” That responsiveness is ELASTICITY.

Elastic Demand For some goods, a rise or fall in price greatly affects demand. Demand for these products is called ELASTIC. Consumers can be flexible when buying these items. Coffee is very elastic. People will shift from Folgers to Tasters Choice.

Inelastic Demand If a price change does NOT result in a substantial change in quantity demanded, it’s inelastic. Pharmaceutical drugs are inelastic. People will buy them no matter how much the price is raised.

What Determines Price Elasticity of Demand? 1.Existence of substitutes- the more substitutes, the more elastic it is. (Soft drinks) 2.Percentage of total budget- pepper is inelastic; housing is elastic. 3.Time to adjust to price changes.

Substitutes The more substitutes, the more elastic a product is. People just switch when price rises.

Percentage of Total Budget If a product costs a small percentage of your total budget, like pepper, it’s inelastic. If it costs high percentage of total budget, like housing, it will be elastic.

Time to Adjust to Prices Longer the time span, the greater the price elasticity of demand. If cost of electricity skyrockets tomorrow, it will be inelastic, but over time, people will adjust their consumption.