2 What Is the Law of Demand? As Prices go downquantity demanded goes up
3 Law of Demand (cont.)As prices go upquantity demanded goes down
4 Quantity DemandedThe amount of a good or service that will be purchased at a specific priceQuantity demanded (Qd) – is just a point on the curveOnly price can change the Qd
5 Individual Demand Schedule Market Demand Schedule The Demand ScheduleDemand SchedulesIndividual Demand SchedulePrice of a slice of pizzaQuantity demanded per dayMarket Demand SchedulePrice of a slice of pizzaQuantity demanded per day$.50$1.00$1.50$2.00$2.50$3.0054321$.50$1.00$1.50$2.00$2.50$3.0030025020015010050
6 Price per slice (in dollars) The Demand CurveMarket Demand Curve3.002.502.001.501.00.5050100150200250300350Slices of pizza per dayPrice per slice (in dollars)When reading a demand curve, assume all outside factors, such as income, are held constant.Demand
7 Shifts in DemandCeteris paribus is a Latin phrase economists use meaning “all other things held constant.”When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.
8 What Causes a Shift in Demand? Several factors can lead to a change in demand:1. Income – Normal Goods & Inferior Goods2. Population or the number of consumers3. Consumer expectations
9 4. Consumer tastes & advertising 5. Prices of Related goods Cont.4. Consumer tastes & advertising5. Prices of Related goodsPrice of a substitutePrice of a complement
10 What Is Elasticity of Demand? Elasticity of demand is a measure of how consumers react to a change in price.
11 InelasticDemand for a good that consumers will continue to buy despite a price increaseConsumers are not very sensitive to an increase in price
12 ElasticDemand for a good that is very sensitive to changes in priceA small change in price leads to relatively large change in the Qd
13 Calculating Elasticity Elasticity = percentage change in in quantity demanded/ percentage change in priceOr E= % change in Qd/ % change in PPercentage change = original number – new number/ original number x 100
14 Values of ElasticityElasticity is< 1 = inelasticElasticity is > 1 = elasticElasticity is “0” = unitary
15 Factors Affecting Elasticity 1. Availability of Substitutes2. Relative importance3. Necessities vs. Luxuries4. Change over time