2 Law of Diminishing Marginal Utility Definition: the marginal benefit of using each additional unit of a product during a given period of time will decline
3 How does this affect the demand curve? The demand curve slopes downward because an individuals utility, or overall satisfaction, decreases as they obtain more of a good or service
4 Example of Law of Diminishing Marginal Utility On a hot day, the ice cream truck rolls through your neighborhoodYou will most likely receive the most satisfaction from the first ice cream bar you purchase rather than the second, third, or fourth
5 Why do consumers demand more goods and services at lower prices and fewer at higher prices? 2 reasons:1. Income effect: the change in the amount that consumers will buy because the purchasing power of their income changes
6 Cont.2. Substitution effect: change in the amount that consumers will buy because they buy substitute goods instead
7 Change in Quantity Demanded Definition: an increase or decrease in the amount demanded because of change in priceA change in quantity demanded does not shift the demand curve
8 Change in DemandDefinition: occurs when something prompts consumers to buy different amounts at every priceChange in demand is also called a shift in demand because it shifts the position of the demand curve
9 Change in Demand Cont.Example: high unemployment rate can cause consumers to buy different quantities of goods/services
10 6 factors can cause a change in demand 1. Income: as income increases/decreases it affects a person’s ability to purchase goods and servicesChanges in income also affect the market demand curveIf most consumers’ incomes in a market go up, total demand will increase
11 Increased Income Affects 2 Types of Goods Normal goods: goods that consumers demand more of when their income risesExample: new car
12 Inferior GoodsDefinition: goods that consumers demand less of when their income risesExamples: used books, off-brands
13 6 factors (continued)2. Market size: if the number of consumers increases or decreases it also affects the market sizeExample: significant increase in population in the Southwest
14 6 factors (continued)3. Consumer tastes: when a good/service is popular consumers demand more of it at all pricesWhen the product becomes less popular, consumers demand less of it
16 6 factors (continued)5. Substitute goods: goods and services that can be used in place of each otherIf the price of a substitute good drops, people will buy that good and not the original item
17 6 factors (continued)6. Complementary goods: goods that are used togetherAn increase in the demand for one good increases the demand for the complementary good
18 Substitute Goods vs. Complimentary Goods 1. List 3 substitutes for pop.Water, juice, milk, lemonade, tea, coffee, etc.2. List 3 compliments for hamburgers.Fries, lettuce, tomatoes, pickles, etc.
19 Questions1. Explain why an increase in income can lead to a decrease in demand.2. Name one thing that can affect market size.
20 Questions3. The U.S. government has used many strategies to reduce smoking. It has banned TV ads for cigarettes, run public service messages about the health risks of smoking, and has imposed high taxes on cigarettes. Which factors that affect demand was the government trying to influence?
21 Questions4. Do you think changes in consumer taste are often initiated by the consumers themselves or by manufacturers and advertisers? Explain your answer using at least one real-life example.
22 Questions5. A popular band has released their latest CD and has been given a clothing endorsement. Explain how will the demand curve of this clothing company be affected.