Demand

Law of Demand Demand is an inverse relationship between the quantity demanded and the price of a product. As price drops, demand increases. Example: If the price of something drops, people will buy more of it. This is not a hard and fast rule; there are execeptions.

What is Demand? Demand – quantities of a particular good that people are willing to buy at different prices at a particular time. If you don’t have the money to buy something, or don’t want to buy it, you won’t directly affect demand.

Price Effect People buy less at higher prices than t hey do at lower prices. Four things determine price effect: 1. buying power 2. diminishing personal value 3. diminishing marginal utility 4. availabilty of substitutes

Buying Power You have a given amount of money. If price decreases you can buy more of an item with your money. If price increase you can buy less. Example: You have $10. If cheeseburgers are $5 each you can only buy 2. If they are $3 each you can buy 3.

Diminishing Personal Value You spend your money on those things that you value most. If you only have a certain amount of money you will spend it on the things that bring you the most return. Example: If you only have enough money to fill your gas tank half way, you will only drive to the places that are most important to you. No recreational driving!

Diminishing Marginal Utility The point at which an additional unit of something is less satisfying than the one before it. As long as something is bringing you satisfaction you will buy it. If satisfaction stops you won’t buy it. Example: You buy two slices of pizza. You are still hungry so you buy a third slice. Now you are getting full so you don’t buy a fourth slice.

Substitutes A good or service that can replace another good or service, Example: Buying a frozen pizza instead of delivery (cheaper, don’t have to tip the delivery driver) Example: Taking public transportation instead of driving (save gasoline, parking fees)

Market Demand The total of all the individual demands in a given market at a particular time. Example: You and your friends go out for pizza. You want 3 slices, one friend wants 2 slices, another friend wants 4 slices, and a fourth friend wants 3 slices. A medium pizza has 8 slices so you either need to buy a large or 2 mediums.

Price Elasticity of Demand Measures the impact of the price effect. If the effect is large then the price is said to be elastic. If the effect is small then it is inelastic. Example: The price of a school lunch goes down and a large number of students buy lunch. The demand is elastic. If few people buy lunches at the lower price then demand is inelastic.

Price Effect and Change in Demand Does a change in price cause a change in demand? For demand to change the entire line must move or shift.

Causes Change in income – buying power changes Price or availability of substitutes Price or availability of complimentary goods – goods used together – price of gas rises demand for motor scooters increases. Change in weather or season Change in number of buyers Changes in styles, tastes, and habits

Change in expectations – predicted change in price could shift the demand curve. If people think price of something is going to change they may hold off buying or buy more and stock up.