Demand Chapter 4

Understanding Demand Chapter 4, Section 1

The Law of Demand Consumers buy more of a good when its price decreases and less of a good when its price increases Consumers buy more of a good when its price decreases and less of a good when its price increases –Simply...we buy or want more at lower prices –Pizza is $1...we buy 3 slices. Pizza is $1.50, we buy two slices

What may influence Demand? Substitution effect...consumers react to an increase or decreases in price by purchasing a different good (a substitute) Substitution effect...consumers react to an increase or decreases in price by purchasing a different good (a substitute) Income effect...when prices rise, you buy fewer of the same goods due to your limited income Income effect...when prices rise, you buy fewer of the same goods due to your limited income

Understanding Demand To have demand for a good you must have the desire but also be able to afford it. To have demand for a good you must have the desire but also be able to afford it. –You don’t have demand for dream goods –Producers do not meet demand for the products we dream to have

Demand Schedule A table that list the quantity of a good that a person will buy at each price A table that list the quantity of a good that a person will buy at each price $14 $23 $32 $41

Market Demand Schedules The demand schedule for the whole market is known as the market demand schedule The demand schedule for the whole market is known as the market demand schedule –These are important to producers as just one person’s demand schedule is not very useful It represents the sum of all individual demand schedules It represents the sum of all individual demand schedules

The Demand Curve A graphic representation of a demand schedule A graphic representation of a demand schedule Only accurate when all things remain constant (ceteris paribus) Only accurate when all things remain constant (ceteris paribus) This represents a change in quantity demanded This represents a change in quantity demanded Market Demand Curve Slices of pizza per day Price per slice (in dollars)

Review 1. The law of demand states that (a) consumers will buy more when a price increases. (b) price will not influence demand. (c) consumers will buy less when a price decreases. (d) consumers will buy more when a price decreases. 2. If the price of a good rises and income stays the same, what is the effect on demand? (a) The prices of other goods drop. (b) Fewer goods are bought. (c) More goods are bought. (d) Demand stays the same.

Shifts of the Demand Curve Chapter 4, Section 2

Shifts in Demand If all does not remain constant (ceteris paribus) there will be a shift in demand If all does not remain constant (ceteris paribus) there will be a shift in demand Movement no longer occurs along the curve. The entire curve shifts. Movement no longer occurs along the curve. The entire curve shifts. Represents a complete change of demand Represents a complete change of demand

Shift in Demand Slices of pizza per day Price per slice (in dollars)

What causes a shift? Income Income Consumer Expectations Consumer Expectations Population Population Consumer tastes and advertising Consumer tastes and advertising

Income Income...a change in income will cause a change in demand Income...a change in income will cause a change in demand –Normal goods...goods that consumers demand more of when their income increases (real maple syrup) –Inferior goods...goods that consumers demand less of when their income increases (imitation maple syrup)

Consumer Expectations What we know may happen in the future affects our demand What we know may happen in the future affects our demand –Ex...gas after Katrina –Ex…snow shovels after big snowstorm –Ex…SALES!!!

Population Changes in population can change demand Changes in population can change demand Rise in population will increase demand for houses, food, clothes, etc. Rise in population will increase demand for houses, food, clothes, etc. –Ex...the baby boom Had to build new schools, neighborhoods, etc. Had to build new schools, neighborhoods, etc. –What services will be in higher demand when the baby boomers retire?

Consumer Tastes and Advertising Your tastes for products and advertising changes demand Your tastes for products and advertising changes demand Advertising shifts demand curve because it plays a role in trends & fads Advertising shifts demand curve because it plays a role in trends & fads –Ex...I-Pod Nano –Ex…Smartphones –Ex…Clothes

Demand for Goods can Affect Each Other Compliments...when the demand for one product changes, the demand for the compliment changes Compliments...when the demand for one product changes, the demand for the compliment changes –Ex...skis and boots, salt and pepper Substitutes...when the demand for a product changes, the demand for its replacement changes Substitutes...when the demand for a product changes, the demand for its replacement changes –Ex...skis vs. snowboards

Review 1. Which of the following does not cause a shift of an entire demand curve? (a) a change in price (b) a change in income (c) a change in consumer expectations (d) a change in the size of the population 2. Which of the following statements is accurate? (a) When two goods are complementary, increased demand for one will cause decreased demand for the other. (b) When two goods are complementary, increased demand for one will cause increased demand for the other. (c) If two goods are substitutes, increased demand for one will cause increased demand for the other. (d) A drop in the price of one good will cause increased demand for its substitute.

Elasticity of Demand Chapter 4, Section 3

Elasticity of Demand Elasticity of demand is a measure of how consumers react to a change in price Elasticity of demand is a measure of how consumers react to a change in price –If demand is inelastic, you have a hard time going without it –If demand is elastic, you can take it or leave it

Calculating elasticity of demand Percentage change in quantity demanded ____________________________ Percentage change in price If the result is greater than 1, demand is elastic If the result is greater than 1, demand is elastic

Elastic Demand Elastic Demand is flatter

Inelastic demand Inelastic demand is steeper

Factors Affecting Elasticity Availability of substitutes Availability of substitutes –If there are few substitutes, demand will be inelastic Relative Importance Relative Importance –How much do you currently spend on the product? –What is it worth to you? Ex  ½ of your budget on clothes. Price increase will affect your purchases Ex  ½ of your budget on clothes. Price increase will affect your purchases

Factors Affecting Elasticity Necessities vs. Luxuries Necessities vs. Luxuries –Do you need it or don’t you Milk for kids (necessary). any price Milk for kids (necessary). any price Steak (luxury). Won’t a high price Steak (luxury). Won’t a high price Change over time Change over time –Substitutes become available over time so demand may become more elastic

Elasticity and Total Revenue Total Revenue (TR) is the total amount of money a firm receives from selling goods and services Total Revenue (TR) is the total amount of money a firm receives from selling goods and services Firms need to know elasticity to help determine price Firms need to know elasticity to help determine price –If elastic, a higher price decreases TR –If inelastic, a higher price increases TR

Review 1. What does elasticity of demand measure? (a) an increase in the quantity available (b) a decrease in the quantity demanded (c) how much buyers will cut back or increase their demand when prices rise or fall (d) the amount of time consumers need to change their demand for a good 2. What effect does the availability of many substitute goods have on the elasticity of demand for a good? (a) Demand is elastic. (b) Demand is inelastic. (c) Demand is unitary elastic. (d) The availability of substitutes does not have an effect.