Demand 1

Connection to Circular Flow Model 1.Do individuals supply or demand? 2.Do business supply or demand? 3.Who demands in the product market? 4.Who supplies in the product market? 2

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DEMAND DEFINED What is Demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for one) What is the Law of Demand? The law states that there is an INVERSE relationship between price and quantity demanded; it also describes the behavior of consumers 5

LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Price Quantity Demanded 6

Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: 1.The Substitution effect 2.The Income effect 3.The Law of Diminishing Marginal Utility We will define and explain each… 7

If the price goes up for a product, consumers buy less of that product and more of another substitute product (and vice versa) 1. The Substitution Effect Why does the Law of Demand occur? 8 or

Why does the Law of Demand occur? 2. The Income Effect If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more. 9 “I have so much purchasing power that I can buy four bags of stuff instead of just one! I’m ecstatic!!!”

EXAMPLE: people will shop at designer boutiques as their income rises and not shop as often at Wal- Mart 10 Income Effect: the change in demand for a good when the income of the purchaser changes. Substitution Effect: the change in demand for a good when the relative price between a good and its substitute changes. EXAMPLE: People will buy the generic brand if the price of the name brand rises.

Income Effect continued 11 Superior Goods (Normal Goods) have a demand that varies directly with income. Inferior Goods have a demand that varies inversely with income. As income rises, Ferrari’s are more in demand than Toyota Corolla’s As income falls, the demand for cheap paper plates rises

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. Discussion Questions: 1.What does this have to do with the Law of Demand? 2.How does this affect the pricing of businesses? 3. Law of Diminishing Marginal Utility Why does the Law of Demand occur? U-TIL-IT-Y 12

Change N/A $54 $33 $15 $10 $5 Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

The Law of Diminishing Marginal Utility 14

Graphing Demand 15

The Demand Curve A demand curve is a graphical representation of a demand schedule. The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) When reading a demand curve, assume all outside factors, such as income, are held constant. (ceteris paribus) Let’s draw a new demand curve for cereal… 16

GRAPHING DEMAND Q o $ Price of Cereal Quantity of Cereal Demand Schedule Draw this in your notes 17 Price Quantity Demanded $510 $420 $330 $250 $180

GRAPHING DEMAND Q o $ Price of Cereal Quantity of Cereal Demand Schedule Price Quantity Demanded $510 $420 $330 $250 $180 Demand

Where do you get the Market Demand? Q Billy PriceQ Demd $51 $42 $33 $25 $17 JeanOther Individuals PriceQ Demd $50 $41 $32 $23 $15 PriceQ Demd $59 $417 $325 $242 $168 PriceQ Demd $510 $420 $330 $250 $180 Market 3 P Q 2 P Q 25 P Q 30 P $3 DDDD

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