Standard SSEMI2a. Define the Law of Demand.

Demand Price Quantity Demanded Definition: The desire, ability, and willingness to buy a product. (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for one) Law of Demand states the quantity demanded of a good or service varies inversely with the price Quantity Demanded Price

Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: The Substitution effect The Income effect The Law of Diminishing Marginal Utility We will define and explain each… 3 3

Why does the Law of Demand occur? 1. The Substitution Effect If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa) 2. The Income Effect If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more. 4

Why does the Law of Demand occur? 3. Law of Diminishing Marginal Utility U- TIL- IT- Y Utility = Satisfaction We buy goods because we get utility from them The law of diminishing marginal utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit. 5

Demand Curve Price Demand A graph showing quantity demanded at each and every price in the market. Price Demand Quantity Demanded

Marginal Utility Marginal Extra The extra usefulness or satisfaction a person gets from acquiring or using one more unit of product Diminishing Marginal utility: states the extra satisfaction we get from using additional quantities of the product begins to diminish Marginal Extra

Change in Quantity Demanded A movement ALONG THE DEMAND CURVE that shows the change in quantity in response to a change in price. $100 100 units

Remember: NICEST Change in Demand When there is a CHANGE in DEMAND: People are now willing to buy different amounts of the product at the same prices. There are 6 factors that cause a change in demand: Remember: NICEST

Number of Consumers The market curve shifts as the number of consumers change. With the U.S. population aging, demand for different products will increase

Consumer Income Changes in the amount a person makes can cause a change in demand.

Complements Goods that are related The use of one increases the use of the other Peanut butter and Jelly Chips and dip

Changes in Expectations This refers to the way people think about the future. If people believe that the future, their job or their lifestyle will experience significant change, consumer spending will likely decrease.

Substitutes A product can be used in place of another product. You can use Splenda or Equal for Sugar

Consumer taste Consumers do not always want the same things over time. Are Beenie Babies still popular? What about Smart phones?