Demand

Demand- defn Law of Demand-(price effect) people buy less of something at higher prices and vice versa; movement along the curve 4 reasons –Buying power: as prices drop you can get more stuff for your money –Diminishing personal value: as price rises, we take a closer look at our usefulness (utility) for that G/S

–Diminishing marginal utility: the point reached when the next item consumed is less satisfying than the one before; as your utility decreases, you are less willing to pay for it so lower prices are necessary –Substitutes: defn If the price of one item goes up, a substitute’s demand will be affected ex: price of coke increases, demand for Sam’s choice increases

Demand curves slope Down from left to right with P on vertical axis and Q beneath Demand schedule- table showing the information you will see graphed Market Demand- the SUM of all individual demands in a market. Who will this info be valuable to and how so?

Shifts in Demand: Law of demand looks at changes in price (along the curve) other things constant Changes in demand- the whole line moves either to the right (increase) or left (decrease) due to some other reason:

1. Change in income: as it rises, we are more willing to pay higher prices for the same quantity (income effect) Normal goods (defn)- goods consumers demand more of when their incomes increase ex- coca cola Inferior goods (defn)- goods consumers buy less of when income increases ex: Sam’s choice cola

Normal Good Inferior Good

2. Prices or availability of substitutes: a change in the price of 1 item affects demand for its substitute Ex: price of steak rises, demand for chicken rises; if coke is sold out, demand for pepsi will increase

3. complementary goods (defn)- goods that are used together ; if price of 1 rises causing its demand to fall, then demand for the comp good will also fall ex: price of hot dogs rises, so demand for hot dog buns falls 4. change in weather/ season- people travel in the Summer causing demand for gas to increase 5. change in styles, tastes, habits- ex: health food craze, hip-hugger jeans

6. change in number of buyers- increase in population will increase demand for housing, jobs, etc. 7. change in expectations- if people expect scarcity or price changes in the future, it will affect their demand todayEx: if you expect the gas prices to increase due to a hurricane in the gulf, you will go fill up your car today in anticipation

Elasticity of Demand: (Defn) measures the impact of a price change (price effect); how drastically will buyers change their demand for a good when the price changes –Inelastic: a price change causes only a small change in quantity demanded ex- insulin, salt, milk –Elastic: a price change causes a large change in quantity demanded ex- cars, steak, soft drinks

Total revenue (TR=P x Q) test- if TR falls, demand is elastic; if TR rises, demand is inelastic. In other words, there is a price increase which law of demand says should cause our demand to fall, but an inelastic good’ s demand will not change enough for the TR to fall. Elasticity of demand is different for different G&S for the following reasons: 1. Availability of substitutes: more subs means more elastic demand

2. percentage of budget- The higher percentage of your budget you spend on a product, the more elastic it tends to be; you are forced to make changes if the price increases b/c you already spend so much on it. Smaller % = inelastic. Ex: clothes elastic, shoelaces inelastic

3. time- the longer people have to adjust to a price change, the more elastic demand tends to be short term-inelastic; long term-elastic If gas prices soar today, demand is inelastic b/c you don’t have time to plan or make adjustments or find substitutes; if prices stay high, you have time to adjust making demand elastic.

4. necessities vs. luxuries- People will buy necessities even when prices rise making its demand ________. People can do without luxuries so they can adjust their demand when the price changes. Ex: steak- elastic Why?