DEMAND

Law of Demand  An increase in a goods price causes a decrease in the quantity demanded and a decrease in a goods price causes an increase in the quantity demanded

3 Concepts that explain the Law of Demand  Income Effect  Substitution Effect  Diminishing Marginal Utility

Demand Schedule A demand schedule simply shows the quantity demanded at several different prices.

Demand curve A demand curve is just a graphic illustration of a demand schedule showing the relationship between price and quantity demanded.

Change in quantity demanded vs. change in demand Change in quantity demanded Change in demand

Determinants of Demand  Factors that cause the entire demand curve to shift to the right or left, instead of merely causing movement along the curve.

5 Determinants  Consumer taste and Preference  Market Size  Income  Prices of Related Goods  Consumer Expectations

Consumer Taste and Preference  Zubaz  Cool in the early 90’s  Not cool anymore

Tastes and preferences  This slide illustrates how increased popularity of a good causes the Demand Curve to shift to the right. The demand increases at every possible price. People are willing to pay more because it is in style.

Market Size  The larger the market the more demand.  Before the ad campaign few people knew of the product but after running a tv commercial in a large city more people are aware of the product which causes an increase in demand.

Demand and Market Size  An increase in the number of buyers results in an increase in demand. A national ad campaign increases awareness of a product. A decrease in buyers (in red) would result in the curve shifting left.

Income Effect  As income increases it generally causes an increase in demand.

Income and demand: normal goods  A good is a normal good if an increase in income results in an increase in the demand for the good.

Income and demand: inferior goods  A good is an inferior good if an increase in income results in a reduction in the demand for the good. This demand curve is for Spam, when the minimum wage rises more people buy steak instead of Spam resulting in a decreased demand for Spam.

Price of Related Goods  Substitute Goods  Products that can be used to replace the purchase of similar goods when prices rise.

Substitute Goods

Change in the price of a substitute good  Price of coffee rises: The rise in coffee prices causes some people to switch to Tea as a substitute, as a result the Demand Curve for Tea shifts to the right.

Complementary Goods Complementary goods are goods that are used together such as hot dogs and hot dog buns or paint and paint brushes. When the price of one changes it changes not only the quantity demand for that item but also for its complement. Price of hot dogs rises which causes not only the quantity demanded for hot dogs to decrease but also the demand for hot dog buns to shift to the left.

Change in the price of a complementary good  Price of DVDs rises: because the price of DVD’s has risen fewer people are buying DVD players.

Consumer Expectations

Expectations  A higher expected future price will increase current demand.  A lower expected future price will decrease current demand.  A higher expected future income will increase the demand for all normal goods.  A lower expected future income will reduce the demand for all normal goods.

Elasticity of Demand  The degree to which changes in a good’s price effects the quantity demanded by consumers.

Demand Elasticity

Elastic Demand  Elastic Demand exists when a small change in a good’s price causes a major, opposite change in the quantity demanded.  The product is not a necessity.  There are readily available substitutes.  The products cost represents a large portion of consumers’ income.

Elastic Demand Curve  When a good is a elastic in demand its curve tends to be horizontal indicating that a small change in price drastically decreases the quantity demanded.

Not a Necessity Because pizza is not a necessity (for most people) when the price of pizza rises the demand for pizza decreases dramatically.

Readily Available Substitutes If another fast food restaurant has lower prices and I consider the food equally as good I will go to the cheaper substitute.

Large portion of Income Yachts are expensive so if they go up even a few percent that could be thousands of dollars which will effect the willingness to buy.

Inelastic Demand  Inelastic demand exists when a change in a good’s price has little impact on the quantity demanded.  The product is a necessity.  There are few or no readily available substitutes.  The products cost represents a small portion of consumers’ income.

Inelastic Demand Curve  When a good is Inelastic in demand its curve tends to be more vertical indicating that the quantity demanded changes little even though price rises or falls significantly.

Necessity Goods that are necessary tend to have inelastic demand. People who need medicine to stay alive will demand medicine at just about any price so even when the price rises the quantity demanded changes very little.

Few or No Substitutes Items with few or no substitutes have inelastic demand. Milk is an example because there are no good substitutes for milk so even when the price rises the quantity demanded changes very little.

Small Portion of Income Items that are relatively inexpensive have inelastic demand because even when price rises it does not greatly effect income so quantity demand changes very little.

Demand Elasticity  Addictive Drugs  Paper Clips