4-2: What Factors Affect Demand?

Law of Diminishing Marginal Utility Definition: the marginal benefit of using each additional unit of a product during a given period of time will decline

How does this affect the demand curve? The demand curve slopes downward because an individuals utility, or overall satisfaction, decreases as they obtain more of a good or service

Example of Law of Diminishing Marginal Utility On a hot day, the ice cream truck rolls through your neighborhood You will most likely receive the most satisfaction from the first ice cream bar you purchase rather than the second, third, or fourth

Why do consumers demand more goods and services at lower prices and fewer at higher prices? 2 reasons: 1. Income effect: the change in the amount that consumers will buy because the purchasing power of their income changes

Cont. 2. Substitution effect: change in the amount that consumers will buy because they buy substitute goods instead

Change in Quantity Demanded Definition: an increase or decrease in the amount demanded because of change in price A change in quantity demanded does not shift the demand curve

Change in Demand Definition: occurs when something prompts consumers to buy different amounts at every price Change in demand is also called a shift in demand because it shifts the position of the demand curve

Change in Demand Cont. Example: high unemployment rate can cause consumers to buy different quantities of goods/services

6 factors can cause a change in demand 1. Income: as income increases/decreases it affects a person’s ability to purchase goods and services Changes in income also affect the market demand curve If most consumers’ incomes in a market go up, total demand will increase

Increased Income Affects 2 Types of Goods Normal goods: goods that consumers demand more of when their income rises Example: new car

Inferior Goods Definition: goods that consumers demand less of when their income rises Examples: used books, off-brands

6 factors (continued) 2. Market size: if the number of consumers increases or decreases it also affects the market size Example: significant increase in population in the Southwest

6 factors (continued) 3. Consumer tastes: when a good/service is popular consumers demand more of it at all prices When the product becomes less popular, consumers demand less of it

6 factors (continued) 4. Consumer expectations: future expectation can affect today’s buying habits

6 factors (continued) 5. Substitute goods: goods and services that can be used in place of each other If the price of a substitute good drops, people will buy that good and not the original item

6 factors (continued) 6. Complementary goods: goods that are used together An increase in the demand for one good increases the demand for the complementary good

Substitute Goods vs. Complimentary Goods 1. List 3 substitutes for pop. Water, juice, milk, lemonade, tea, coffee, etc. 2. List 3 compliments for hamburgers. Fries, lettuce, tomatoes, pickles, etc.

Questions 1. Explain why an increase in income can lead to a decrease in demand. 2. Name one thing that can affect market size.

Questions 3. The U.S. government has used many strategies to reduce smoking. It has banned TV ads for cigarettes, run public service messages about the health risks of smoking, and has imposed high taxes on cigarettes. Which factors that affect demand was the government trying to influence?

Questions 4. Do you think changes in consumer taste are often initiated by the consumers themselves or by manufacturers and advertisers? Explain your answer using at least one real-life example.

Questions 5. A popular band has released their latest CD and has been given a clothing endorsement. Explain how will the demand curve of this clothing company be affected.