Demand

  Objectives:  Explain the law of demand.  Describe how the substitution effect and the income effect influence decisions.  Create a demand schedule for an individual and a market.  Interpret a demand graph using demand schedules. Section 1: Understanding Demand

  One free Test Pass

  The desire to own something and be able to pay for it  The law of Demand  Consumers will buy more of a good when its price is lower and less when the price is higher Demand

  The Substitution Effect  Consumers react to a rise in the price of one good by consuming less of that good and more of a substitute good  The Income Effect  The change in consumption that results when a price increase caused real income to decline  Feeling richer or poorer

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  Economists measure consumption not the amount of money spent to buy it

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  To have a demand for a good, you must be willing and able to buy it at the specified price. Demand means that you want the good and can afford to buy it. You may desperately want a new car, a laptop computer, or a trip to Alaska, but if you can’t truly afford any of these goods, you do not demand them. Can I afford that?

  A table that lists the quantity of a good that a person will purchase at various prices A Demand Schedule

  Market Demand Schedules  Table that lists the quantity of a good all consumers in a market will buy at various prices

 The Demand Graph  Graphic Representation of a demand schedule

  Objectives:  Explain the difference between a change in quantity demanded and a shift if the demand curve  Identify the factors that create changes in demand and that can cause a shift in the demand curve.  Give an example of how a change in demand for one good can affect demand for a related good. Section 2: Shifts in the Demand Curve

  Ceteris Paribus  “all things held constant”  Demand curves are only accurate as long as there are no other changes that could affect price  EX: natural disasters Changes in Demand

  Moving from $2 to $3 =  Movement is referred to as decrease in the quantity demanded (or increase in the quantity demanded)

  Income  Normal goods – goods that consumers demand more of when their income increases  Inferior goods – goods you would buy in smaller quantities, or not at all, if you income were to rise and you could afford something better

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  Consumer Expectations  Population  Demographics – statistical characteristics of a population  Age, race, gender etc.  Consumer Tastes and Advertising

  Complements  2 goods that are bought and used together  Substitutes  Goods that are used in place of one another Prices of Related Goods

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  Objectives:  Explain how to calculate elasticity of demand.  Identify factors that affect elasticity.  Explain how firms use elasticity and revenue to make decisions. Section 3: Elasticity of Demand

  Elasticity of Demand  Measure of how consumers respond to price changes  Elastic  Demand that is very sensitive to change  Inelastic  Demand that is not very sensitive to change Elasticity

  Take the percentage change in the quantity of the good demanded  Divide this number by the percentage change in the price of the good  = elasticity of demand Calculating Elasticity

  Law of demand implies that the result will always be negative  Increase in price of a good will always be negative  Why?  Increase in the price of a good will always decrease the quantity demanded  Decrease in price of a good will always increase the quantity demanded

  Price Range  Values of Elasticity  Less than 1 = inelastic  Greater than 1 = elastic  Exactly equal means unitary elastic

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  Availability of Substitutes  Life-saving medications?  Relative Importance  Shoelaces?  Clothing if you spend 50% of your budget on clothes? Factors Affecting Elasticity

  Necessities v. Luxuries  Milk?  Steak?  Change Over Time  Vehicles?

  1. Availability of substitute goods  2. Limited budget  3. Perception of goods

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  Computing a Firms Total Revenue  Total revenue  - amount of money the company receives by selling its goods  2 factors:  1. price of the goods  2. quantity sold Elasticity and Revenue

  Total Revenue and Elastic Demand  Price increase can reduce total revenue

  Total Revenue and Inelastic Demand  Raise prices  Less demanded  Greater revenue (higher price makes up for demand)

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  Elastic or inelastic?  Pricing decisions Elasticity and Pricing Policies

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