Demand Demand = the ability and desire of consumers to buy a good (the desire to own something and the ability to pay for it)

The Law of Demand Consumers buy more of a good when its price decreases and less when its price increases Example: If the price of pizza rises, people will buy fewer slices

Law of Demand The law of demand is the result of two separate patterns of behavior that overlap: the substitution effect and the income effect

The Substitution Effect When consumers react to an increase in a good’s price by consuming less of that good and more of other goods (and vice- versa)

Example of Substitution Effect Consumers purchase tacos and salads instead of pizza because they are less expensive

The Income Effect Takes place when a consumer responds to a price increase by spending more on that good, even though it is more expensive (they spend more, but usually buy less)

Example of Income Effect If you bought fewer slices of pizza without increasing your purchases of other foods (makes us feel poorer)

Demand Schedules and Curves A demand schedule is a table that lists the quantity of a good that all consumers in a market will purchase at each different price A demand curve is a graphic representation of a demand schedule

Shifts of the Demand Curve In reality, factors other than price affect the demand for the pizza (and any other good) A demand curve is accurate only as long as everything else besides price stays the same

Example: decrease in the price of pizza leads to an increase in the quantity demanded (and vice-versa)

Shifts of the Demand Curve When other factors besides price change, we no longer move along the demand curve Instead, the entire demand curve shifts

Shifts of the Demand Curve This means that at every price, consumers buy a different quantity than before Economists refer to this shift of the entire curve as a change in demand

What Causes a Change in Demand (Shift of the Demand Curve)? -NOT price!!! Five factors can lead to a change in demand rather than simply a change in the quantity demanded

1. Income -Most items that we purchase are normal goods-goods that we purchase when our income increases

1. Income -There are also other goods called inferior goods-an increase in income causes demand for these goods to fall (goods that you would buy in smaller quantities, or not at all, if you could afford something better)

Examples of Inferior Goods Macaroni and cheese Generic cereals Used cars

2. Consumer Expectations Our expectations about the future can affect our demand for certain goods today

2. Consumer Expectations If you expect the price of a good to rise, your current demand will rise, which means you will buy the good sooner. If you expect the price to drop, your current demand will fall and you will wait for the lower price (ex: a bike on sale in a week)

3. Population Changes in the size of the population will also affect the demand for most products

3. Population Example: The American soldiers who returned from World War II in the mid-to late 1940s married and started families in record #s (“baby boom”); this led to higher demand for baby clothes, schools, etc. in the 1950s and 1960s

4. Consumer Tastes and Advertising Although economists cannot always figure out the reasons why some fads begin, advertising and publicity often play an important role

4. Consumer Tastes and Advertising This is where advertising comes into play Companies spend money on advertising because they hope it will increase the demand for the goods they sell

5. Prices of Related Goods The demand curve for one good can be affected by a change in the demand for another good. There are two types of related goods that interact this way: complements and substitutes

Complements Complements are two goods that are bought and used together Example: skis and ski boots An increase in the price of ski boots will cause people to buy fewer boots. Because skis are useless without boots, the demand for skis will fall at all prices

Substitutes Substitutes are goods used in place of one another Example: skis and snowboards A rise in the price of snowboards will cause people to buy fewer snowboards and more pairs of new skis at every price because consumers will buy one or the other, but not both (snowboards are a substitute for skis)