Chapter 4--Demand

What is Demand? Demand is the desire to own something and the ability to pay for it

What is Law of Demand? The Law of Demand The principle that, all other factors being equal, consumers will purchase (demand) more of a good or service at lower prices and less of a good at higher prices

OPEC takes a lesson in Supply & Demand In 1973 a barrel of oil sold for $2. –In 1981 a barrel sold for $30. In 1981 many OPEC nations wanted to raise the prices even higher –In addition to high prices, the world’s consumption of oil had dropped 14% in the 2 years prior to 1981.

OPEC Because of the high prices, consumer countries started conserving energy and began using alternative energy such as coal and natural gas as substitutes for oil. Because of the high price per barrel, many OPEC countries had a tough time selling their oil, and were forced to sell their surplus at a lower price.

Income Effect: The effect that a change in an item’s price has on consumer’s ability to purchase goods Example: People who have money will buy whatever they want. A rich person can afford steak a fancy restaurant instead of the average person buying a hamburger at McDonalds or……………..

Good Seats—Nose bleed Seats

Substitution Effect Consumers’ tendency to substitute a lower priced good for a similar, higher priced one Example: Brand name products vs. Generic Brands

Wrangler jeans vs. generic jeans

Kellogg's cereal vs. generic cereal

Complement Goods Complement goods are goods which bought and used together –Buy a cell phone—get the case

Diminishing Marginal Utility The natural decreases in the utility of a good or service as more units of it are consumed EXAMPLE: Buffet

Demand Curve Demand Curve: A graphic representation of a demand schedule showing the relationship between the price of an item and the quantity demanded during a given period with all things being equal

Demand Schedule A table that shows the level of demand for a particular item at various prices

Demand Schedule An economic model that helps us see consumer reaction to various prices of a product. –Prices are shown on the vertical axis –Quantities on the horizontal

Determinants of Demand A non-price factor that influences the amount of demand for a good or service 1.Income 2.Consumer Expectations 3.Population 4.Demographics 5.Consumer Tastes and Adverting

Income Income= The more money your have, the more opportunity you have to ‘upgrade’ your good or service Example: The more spent on tickets, the better seat you get

Consumer Expectations The future can affect our demand for certain goods or services. Example: Buy a new home with tax credits good for the reminder of the year Example: Waiting to buy a new car and just fix up the old car because your worried on your job and future car payment Example: Buy the computer now before the price goes up next week

Population The more of a population in a town/city, the more potential of customers. Example: Targeting farmers in southern Minnesota Example: Having a hotel chain in a large city Example: Selling to consumers over the internet

Demographics The statistical characteristics of the population, such as age, race, gender, occupation, and income level. Example: Targeting a specific group (Farmer, Hispanics, women, teenagers)

Consumer Tastes and Advertising If the producer has a product/service which people like, they will buy it. If they dislike the product/services they won’t buy it. (likes vs. dislikes) (fads in society) Example: Bands and Singers (Liking a particular style of music) Example: The latest style in shoes or clothes Advertising—Target your ad money to your customers (newspapers, internet, magazines, television, bill boards)

What is Elastic Demand? The situation that exists when quantity demanded changes greatly in response to a change in price. This includes: When a product is NOT a necessity When there are readily available substitutes When the product’s cost represents a large portion of consumer’s income

Example of Elastic Demand Pizza –why? –Not a necessity (you can survive without it) –It has readily available substitutes (sub sandwiches or tacos restaurants)

Who Cares about Elasticity? Producers – want to know the price elasticity of demand before they changed the price an elastic good would not sell much if you raised the price An inelastic good would continue to sell

What is Inelastic Demand? The situation that exists when quantity demanded changes only slightly or not at all in response to a change in price This includes: When the product is a necessity When there are few or no readily available substitutes for the product When the product’s cost represents a small portion of the consumers’ income

Example of Inelastic Demand Salt or soap---why? –It is a necessity –There are few or no readily available substitutes –Not expenses—doesn’t take up a large portion of a paycheck

What is Total Revenue? This is a business’s total income; sometimes called total receipts—refers to the total income that a business receives from selling it’s products

Example--Total Revenue Selling 60 Nebraska hats at $10 and 30 jerseys at $50 would be a total revenue of $600 plus $1,500 equaling $2,100 for the Cornhusker team superstore for a day