The Law of Demand …and YOUR powers as a consumer.

Demand Demand—the desire to own something and the ability to pay for it. Quantity Demanded— The amount of a good or service people will buy at a given price, in a given time period.

The Law of Demand An INCREASE in the price of a good or service causes a DECREASE in the quantity demanded, and a DECREASE in the price of a good or a service causes an INCREASE in the quantity demanded… An INCREASE in the price of a good or service causes a DECREASE in the quantity demanded, and a DECREASE in the price of a good or a service causes an INCREASE in the quantity demanded… There is an There is an INVERSE RELATIONSHIP Between Price and Quantity Demanded

Demand vs. Quantity Demanded The way you determine whether or not you are referring to DEMAND or QUANTITY DEMANDED is asking yourself if you are responding specifically to price. If the answer is YES then it is a change in Quantity Demanded. Example: 1. I start car pooling and buy less gas because prices are $4 a gallon. This is a change in QUANTITY DEMANDED. 2. I start car pooling because I believe burning fossil fuels causes global warming. This is a change in DEMAND. In example two my decision had nothing to do with price.

Which of the following issues addresses a change in QUANTITY DEMANDED? A.) biscuits are on sale, so I buy two extra. B.) the Gators win the national championship, so I buy a hat. C.) I hear that broccoli is healthy, so I start buying more of it.

Demand Schedule for Stereos Price per Car Stereo $500 $400 $300 $200 $100 Quantity Demanded 500 1,000 1,500 2,500 5,000

Demand Curve $500 $400 $300 $200 $ PRICEPRICE Quantity Demanded

Changes in Demand What can cause demand to change? Price? NO. A change in price just causes a change in the Quantity Demanded. To cause a change in demand, other things must happen:

1. Diminishing Marginal Utility The marginal utility of each unit LESSENS with each unit. For example… $3 for an ice cream cone (your first) might seem well worth the money… Maybe even a second cone would seem worth another three bucks… But for your third? Maybe $1.50? Your fourth? What? 75 cents? A fifth? Would you even take it for nothing? The ADDITIONAL USEFULLNESS diminishes with each unit consumed.

Examples of Demand-Changes Causes 2. Consumer Tastes—the demand for poofy haircuts is very low because they are UNFASHIONABLE… …Not because they are EXPENSIVE. 3. Population Size—when people begin crowding an area, the demand for… …Housing, parking, tables at restaurants, etc., INCREASES. 4. The income effect—as people become more wealthy, they buy more stuff... …Their demand for luxury cars might INCREASE, regardless of high prices.

Which of the following addresses the "income effect" as it relates to demand? A.) a new bus route causes a local movie theater to increase its sales. B.) Cobb County teachers take a pay cut, so fewer of them go on vacation. C.) it becomes fashionable to wear parachute pants; sales increase.

When the building of a new subdivision increases sales for a local movie theater, the theater has benefited from the... A.) population effect. B.) income effect.

More Examples of Demand Change 5. The Complementary Effect—if the price of milk goes up… …The QUANTITY of milk DEMANDED will decrease… …And the DEMAND for cereal will also decrease. 6.The Substitute Effect—if the price of hotdogs rises… …The QUANTITY of hotdogs DEMANDED will decrease… …And the DEMAND for hamburgers will increase.

When the price of pillows rises, the demand for pillowcases decreases. This is known as the... A.) substitution effect. B.) income effect. C.) population effect. D.) complementary effect.

When the price of Pepsi rises, the demand for Coke increases. This is known as the... A.) complementary effect. B.) substitution effect. C.) income effect. D.) population effect.

Demand Change: Consumer Expectations 7. If consumers expect that prices will FALL in future… …current demand will …DECREASE. 8. If consumers expect that prices will RISE in the future… …current demand will… …INCREASE.

Future expectation of high prices will cause current demand to... A.) fall B.) rise

Elasticity of Demand Elastic demand occurs when a small change in the price of a good causes a major, opposite change in the quantity demanded… For example… If movie tickets went up by three dollars (a small change)… It could possibly cause an enormous change in the quantity of movie tickets demanded. Elastic demand usually applies to WANTS, rather than NEEDS.

Inelastic Demand Inelastic demand exists when the price of a good has little impact on the quantity demanded… The demand for bread, milk…what else?...tends to be inelastic. And inelastic demand usually applies to NEEDS, rather than…?

Elastic or Inelastic DEMAND? Diapers A.) elastic B.) inelastic

Hotdogs A.) elastic B.) inelastic

Healthcare A.) elastic B.) inelastic

Magazines A.) elastic B.) inelastic

Electricity A.) elastic B.) inelastic

Gasoline A.) elastic B.) inelastic

Chewing gum A.) elastic B.) inelastic

Tennis balls A.) elastic B.) inelastic