1. Chapter 4 Demand

2. What is Demand? In a free enterprise economy, their must be cooperation between consumers and producers When we desire to have a good or service it is called demand The law of demand states that when prices go down, consumers buy more of it; when prices go up, consumers buy less of it

4. Demand Schedules If DVD’s cost $30 how many will a consumer purchase? 0 How about $20? 2 How about $10 4 Price Per DVD ($) Quantity Demanded 300 251 202 153 104 75 66 57

5. Demand Curves A demand curve is a graph that shows how much of a good or service and individual will buy at each price. To graph a demand curve you transfer information from a table or schedule to a graph. A demand curve should always run downward.

6. Demand Curve Price Per DVD ($) Quantity Demanded 300 251 202 153 104 75 66 57

7. Law of Diminishing Marginal Utility   States the marginal benefit from using each additional unit of a product over a given time period will decline. It is a hot day and you just ate an ice cream cone, would you gain the same benefit (satisfaction) from a second? How about a third? In all likelihood, you would find the second less satisfying than the first, and the third less than the second.

8. Diminishing Marginal Utility Here is a graph of video games and the law of diminishing marginal utility’s affect on them.

9. Factors That Affect Demand So why do consumers demand more goods and services at lower prices and fewer at higher prices? Economists list two reasons: Income Effect Substitution Effect

10. Income Effect Income effect is the change in the amount consumers will buy because the purchasing power of their income changes You can buy more clothes if they are marked at $10 than if they are marked at $20. You feel like you like you received a good deal, so you usually buy another shirt/pants, etc… The income effect also influences behavior when prices rise. You don’t feel quite as good when you purchase one shirt for $20, therefore you probably don’t purchase several more. Basically, if prices drop you feel richer, if prices rise you feel poorer because it determines how much you can purchase.

11. Substitution Effect The substitution effect is the pattern of behavior that occurs when consumers react to a change in the price of a good or service by buying a substitute good The substitution effect is the pattern of behavior that occurs when consumers react to a change in the price of a good or service by buying a substitute good If the price of paperback books goes up, consumers may purchase fewer books or buy magazines instead. If the price of paperback books goes up, consumers may purchase fewer books or buy magazines instead. If the price of hamburgers goes up, consumers may purchase hot dogs instead. If the price of hamburgers goes up, consumers may purchase hot dogs instead.

12. Change in Demand Change in demand occurs when something (unemployment) prompts consumers to buy different amounts of goods and services at every price. D1D2D1D3

13. Change In Demand There are six factors that can cause a change in demand: There are six factors that can cause a change in demand: 1. Income 2. Market Size 3. Consumer Tastes 4. Consumer Expectations 5. Substitute Goods 6. Complementary Goods

14. Income If a consumer’s income changes, either higher or lower, that person’s ability to buy also changes. Increased income usually increases demand, but in some cases it causes demand to fall. Normal goods are goods that consumers demand more of when their incomes rise Inferior goods are goods that consumers demand less of when their income rise EX. Before John received his raise he shopped at discount stores for his clothes, after his pay raise he spends more on his wardrobe. As a result he demands less discount clothing and purchases name-brand clothing. Discounted clothing is considered an inferior good Other items considered inferior goods are used books and generic food.

15. Market Size If the number of consumers increases or decreases, the market size also changes. Towns like Somerset, KY experience increases in demand from tourists that travel to Lake Cumberland. When the tourism season ends, demand decreases. Regions of the US have experienced changes in market size. The Northeast has decreased in population as many people moved to the South or West.

16. Consumer Tastes Goods or services sometimes enjoy high popularity, meaning consumers demand more of it at every price. But…when a product loses its appeal, consumers demand less of it. Advertising is a big key to increase/decrease of demand Clothing is a great example. Does you closet contain clothing that you had a year ago that you wouldn’t purchase today? If you said yes, you just identified an instance of consumer taste changing demand

17. Consumer Expectations If you think the price of a good or service will change, that can determine whether you purchase it now or wait later. Car dealers usually sell of this years model at the end of the summer to make room for the new models. When would demand for cars be at their highest, May or August? August

18. Substitute Goods Goods and services that can be used in place of other goods and services are called substitute goods. Goods and services that can be used in place of other goods and services are called substitute goods. If the price of beef increases, what meat products could a consumer use as a substitute? If the price of beef increases, what meat products could a consumer use as a substitute? Pork Pork Chicken Chicken Turkey Turkey Fish Fish

19. Complementary Goods When the use of one product increases the use of another product, the two products are called complements. Complementary goods work in tandem with each other. An increase in demand for one will cause an increase in demand for the other. DVD players required DVD’s Due to the DVD’s popularity, they began replacing VCR’s.

20. What Is Elasticity of Demand Elasticity of demand is a measure of how responsive consumers are to price changes. Demand is either elastic or inelastic. Demand is elastic if quantity demanded changes significantly as price changes Demand is inelastic if quantity demanded changes little as price changes

21. Elasticity Continued When consumers have many choices for a particular type of product, demand is elastic. If the price of a certain brand of MP3 player goes down 20% and demand increase 30%, then demand is elastic. Goods that have a large number of substitutes fall into the elastic category. Diabetics need insulin to stay alive, if the price of insulin increased or decreased dramatically the demand would remain constant because diabetics would still need the same amount. Insulin is demand inelastic, because no matter the price demand will remain constant.

22. What Determines Elasticity? 1. 1. Substitute goods or services – if there is no substitute for a good or service demand tends to be inelastic. If there are substitutes for goods and services demand tends to be elastic. 2. 2. Proportion of Income - the percentage of income that you spend on a good or service. Items that cost a lot of your income tend to be elastic, items that cost very little of your income tend to be inelastic. 3. 3. Necessities vs Luxuries – necessities are things you must have (food/water) and they tend to be inelastic. Luxuries are things you desire but is not essential to life, like a plasma tv. The demand for luxuries is elastic.

23. Elastic or Inelastic Demand?

24. Estimating Elasticity Table Salt Ice Cream Sports Car GasInsulinBraces Teeth Are there substitutes? Yes=elastic No=inelastic noyes no What proportion of income does it use? Large=elastic Small=inelastic small largesmall large Is it a necessity or a luxury? Luxury=elastic Necessity=inelastic neclux nec lux Conclusion inelasticelastic inelastic elastic