Demand

A market is any place people come to buy and sell goods and services. A market has two sides: a buying (demand) side and a selling (supply) side. A market is any place people come to buy and sell goods and services. A market has two sides: a buying (demand) side and a selling (supply) side.

Defined The desire to own something and the ability to pay for it. The desire to own something and the ability to pay for it. Demand is the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. Demand is the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period. Willingness to purchase a good refers to a person’s want or desire for the good. Willingness to purchase a good refers to a person’s want or desire for the good. Having the ability to purchase a good means having the money to pay for the good. Having the ability to purchase a good means having the money to pay for the good. Both willingness and ability to purchase must be present for demand to exist Both willingness and ability to purchase must be present for demand to exist

Law of Demand Says that as the price of a good increases, the quantity demanded of a good decreases. As the price of a good decreases, then quantity demanded of the good increases. (Price and quantity demanded move in opposite directions) Says that as the price of a good increases, the quantity demanded of a good decreases. As the price of a good decreases, then quantity demanded of the good increases. (Price and quantity demanded move in opposite directions) If P ↑ then Qd ↓ If P ↑ then Qd ↓ If P ↓ then Qd ↑ If P ↓ then Qd ↑

The law of demand is the result of two patterns: The law of demand is the result of two patterns: –Substitution effect –Income effect

Substitution Effect An alternative to an item in which the price rises. An alternative to an item in which the price rises. Takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good. Takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good. Example: If the price of beef goes up, you may buy more chicken. Example: If the price of beef goes up, you may buy more chicken.

Income Effect When prices go up, it limits our money When prices go up, it limits our money Results when we cut back our purchases of some goods. Results when we cut back our purchases of some goods.

Demand Schedule Lists a quantity of a good that a person will purchase at various prices in a market. Lists a quantity of a good that a person will purchase at various prices in a market.

Market Demand Schedule Looks at consumers as a whole Looks at consumers as a whole When you add up the demand schedules of every buyer in the market When you add up the demand schedules of every buyer in the market Schedule shows the quantities demanded at various prices by all consumers in the market Schedule shows the quantities demanded at various prices by all consumers in the market The only difference between the schedules is that this list larger quantities. The only difference between the schedules is that this list larger quantities.

Demand Curve Graphic representation of a demand schedule. Graphic representation of a demand schedule. Vertical axis is the price and the horizontal axis is the possible quantity demanded. Vertical axis is the price and the horizontal axis is the possible quantity demanded.

Page 90 in packet demand curves Page 90 in packet demand curves

All demand schedules and all demand curves reflect the law of demand All demand schedules and all demand curves reflect the law of demand

Application Producers and advertisers use a variety of methods to try to influence consumer tastes and preferences, and through that, demand. Producers and advertisers use a variety of methods to try to influence consumer tastes and preferences, and through that, demand. Distinguishing fact from opinion in advertising enhances consumer decision making. Distinguishing fact from opinion in advertising enhances consumer decision making. Consumers make better choices when they understand and consider the factors that influence their demand for goods and services. Consumers make better choices when they understand and consider the factors that influence their demand for goods and services. Try to influence demand of product. Try to influence demand of product.

Advertisers are interested in increasing the demand for their products. Advertisers are interested in increasing the demand for their products. Two factors that influence the demand for a product are consumer tastes and preferences. Two factors that influence the demand for a product are consumer tastes and preferences. Consumer tastes and preferences can be things other than price, such as quality, color, design, flavor, size and individual value. Consumer tastes and preferences can be things other than price, such as quality, color, design, flavor, size and individual value.

Shifts in the Demand Curve

Changes in Demand A demand curve is accurate only as long as there are no changes other than price that could affect the consumer’s decision. A demand curve is accurate only as long as there are no changes other than price that could affect the consumer’s decision. When price changes, we move along the curve to a different quantity demanded When price changes, we move along the curve to a different quantity demanded An increase in price results in less quantity demanded An increase in price results in less quantity demanded A decrease in price results in more quantity demanded A decrease in price results in more quantity demanded A change results in an entire shift in the demand curve A change results in an entire shift in the demand curve

Increase in Demand

Decrease in Demand

CAUSES OF SHIFT IN DEMAND CURVE Personal income Personal income Consumer expectations – economy as a whole, future, when are certain products usually cheaper, government actions such as taxes Consumer expectations – economy as a whole, future, when are certain products usually cheaper, government actions such as taxes Changes in population Changes in population Changes in demographics Changes in demographics Changes in consumer tastes Changes in consumer tastes Advertising trends Advertising trends Prices in related goods – complements and substitutes Prices in related goods – complements and substitutes

Elasticity of Demand

Defining Elasticity The way in which consumers respond to price changes. The way in which consumers respond to price changes. How drastically buyers will cut back or increase their demand for a good when the price rises o falls. How drastically buyers will cut back or increase their demand for a good when the price rises o falls. Inelastic – relatively unresponsive to price change Inelastic – relatively unresponsive to price change Elastic – very responsive to price change – rubber band Elastic – very responsive to price change – rubber band

Elastic When a change in price, either up or down, leads to a relatively larger change in the quantity demanded. When a change in price, either up or down, leads to a relatively larger change in the quantity demanded. Demand changes by a larger % than price. For example if price rises by 10% quantity demanded falls 15%. Demand changes by a larger % than price. For example if price rises by 10% quantity demanded falls 15%. Oysters, restaurant meals and automobiles – price changes have a strong impact on how much consumers will buy. Oysters, restaurant meals and automobiles – price changes have a strong impact on how much consumers will buy.

Inelastic When a change in price leads to a relatively smaller change in the quantity demanded. When a change in price leads to a relatively smaller change in the quantity demanded. Quantity demanded changes by a smaller percentage than price. For example if price rises by 10%, quantity demanded falls by 5%. Quantity demanded changes by a smaller percentage than price. For example if price rises by 10%, quantity demanded falls by 5%.

Factors Affecting Elasticity Availability of substitutes Availability of substitutes Relative importance Relative importance Necessities v. Luxuries Necessities v. Luxuries Changing in pricing over time Changing in pricing over time

Elasticity and Revenue Elasticity is important to the study of economics because elasticity helps us measure how consumers respond to price changes for different products. Elasticity is important to the study of economics because elasticity helps us measure how consumers respond to price changes for different products. Also important tool for business planning Also important tool for business planning