Coach Ramsey is Demand September 9, 2008

What is Demand? The desire to own something and the ability to pay for it Just because Coach Ramsey wants a brand new car does not mean he has demand for it. Why not?

Law of Demand States that consumers buy more of a good when price decreases and less of a good when the price increases Quantity Demanded Quantity Demanded Price Price

Law of demand is result of 2 overlapping patterns of behavior: Substitution Effect  takes place when a consumer a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good Income Effect  the change in consumption resulting from a change in real income

Demand Schedules A table that lists the quantity of a good a person will buy at each different price Price Q Demanded 1.00 14 3.00 12 5.00 10 6.00 7 8.00 4 10.00 1

Demand Curve P 14 12 10 Demand = 8 6 4 2 2 4 Qd 6 8 10 12 14

More Demand Stuff

When looking at demand curve, we assumed nothing but price of movie tickets changed Known as ceteris paribus  all other things held constant

What Causes Shifts? Income A. Normal Goods B. Inferior Goods

Consumer Expectations -Future price will rise, demand rises -Future price will fall, demand falls *Current demand for a good is positively related to its expected future price

Consumer Tastes & Advertising Population Consumer Tastes & Advertising Prices of Related Goods Complements Substitutes

P 14 12 10 8 6 4 2 2 4 Qd 6 8 10 12 14

Elasticity of Demand

What is Elasticity of Demand? A measure of how consumers react to a change in price Inelastic Demand vs. Elastic Demand

Calculating Elasticity % Change in Qd = EOD % Change in Price

If EOD > 1 , then we would consider demand to be elastic If EOD < 1 , then we would consider demand to be inelastic If EOD = 1 , then we would consider demand to be unitary elastic

Factors Affecting Elasticity Availability of Substitutes Relative Importance Necessities versus Luxuries Change over time

Elasticity and Revenue Total Revenue  amount a company receives by selling its goods Total Revenue and Elastic Demand Total Revenue and Inelastic Demand