## Presentation on theme: "Chapter 4 Demand Retrieved from: Northern-Virginia-Real-Estate."— Presentation transcript:

Objectives Explain the law of demand Explain the law of demand Understand how the substitution effect and the income effect influence decisions Understand how the substitution effect and the income effect influence decisions Create demand schedule and interpret data using demand graph Create demand schedule and interpret data using demand graph Retrieved from: http://futures.tradingcharts.com/learning/law_of_demand.htmlhttp://futures.tradingcharts.com/learning/law_of_demand.html

Terms you will need to know: Demand Law of demand Substitution effect Income effect Demand schedule Market demand schedule Demand curve Retrieved from: http://www.africanmex.com/webpages/fundamental_analysis.html http://www.africanmex.com/webpages/fundamental_analysis.html

DEMAND: The Desire to own something and the ability to pay for it In a market system, the interaction of buyers and sellers determines the prices of most goods as well of what quantity of a good will be produced demand Buyers demand goods, supply and sellers supply those goods. Retrieved from: http://activerain.trulia.com/blogsview/4294793/nashville-s-2014-housing- market-forecast--still-a-seller-s-market-http://activerain.trulia.com/blogsview/4294793/nashville-s-2014-housing- market-forecast--still-a-seller-s-market-

Simply states that quantity demanded moves in the opposite direction of price ( All other things constant or ceteris paribus). As price rises, quantity demanded decreases P rises Q decreases As price falls, quantity demanded increases P falls Q increases

The Law of Demand is the result of (2) separate patterns that overlap. 1) Substitution effect 1) Substitution effect : When consumers react to an increase in a good’s price by consuming less of that good and more of other goods. Example: If the price of the pizza you eat for lunch increases, you will seek out alternative foods to such as burgers, tacos, etc. (Similarly, if the price of pizza falls, you will buy more pizza and less of other foods) 2) Income effect 2) Income effect : The change in consumption resulting from a change in real income Example: As prices increase you feel poorer because you can no longer afford the same things with the money you make. The income effect then means that you will simply cut back on consumption rather than just finding alternatives (think about water, electricity, etc.) These two patterns describe two different ways consumers can change their spending patterns and explain why an increase in price decreases the quantity purchased. * Retrieved from: http://www.bestthinking.com/articles/economics/macroeconomic s/the-relation-between-supply-and-demand http://www.bestthinking.com/articles/economics/macroeconomic s/the-relation-between-supply-and-demand

What is a Demand Schedule: * A table that lists the quantity of a good a person will buy at each different price. * (Basically, a graph that outlines the relationship between price and quantity demanded for a certain good.) Types to consider: Individual demand schedule Individual demand schedule: Places emphasis on the specific quantities an individual is willing and able to purchase at a specific price. Market demand schedule Market demand schedule: Lists the quantity of a good all consumers in a market will buy at each different price. (Can be formed by surveying customers and adding up the quantities demanded by individual consumers at each price) Retrieved From: http://www.harpercollege.edu/mhealy/eco212i/lectures/ch3-18.htm http://www.harpercollege.edu/mhealy/eco212i/lectures/ch3-18.htm

Section Two Shifts on the Demand Curve Chapter 4 Demand

Ceteris paribus Ceteris paribus Normal Good Normal Good Inferior Good Inferior Good Complements Complements Substitutes Substitutes Retrieved from: https://www.onlinetexts.comhttps://www.onlinetexts.com

Ceteris Paribus This is a Latin phrase that simply means, “ all other things held constant.” When dealing with basic demand and supply curves the assumption that only price will affect the increase or decrease of a quantity Decrease in quantity demanded Decrease in quantity demanded: Increase in price of goods Increase in quantity demanded Increase in quantity demanded: Decrease in price of goods Remember: Under the idea of ceteris paribus, the change in Quantity (Q) is dependent on the Change in Price (P)

Other factors besides price can also cause the demand for a good to change. Income: Simply, a change in income (either increase or decrease) can affect a consumer’s demand for goods. Income: Simply, a change in income (either increase or decrease) can affect a consumer’s demand for goods. Normal Good: A good that consumers demand more when their income increases Normal Good: A good that consumers demand more when their income increases Inferior Good: A good that consumers demand less of when their income increases (generic brands) Inferior Good: A good that consumers demand less of when their income increases (generic brands) Consumer Expectations: Current demand for a good is positively related to its expected future price Consumer Expectations: Current demand for a good is positively related to its expected future price If you expect the price of an item to go up in a week your present demand will increase, if you expect it to go down in a week your present demand will decrease) If you expect the price of an item to go up in a week your present demand will increase, if you expect it to go down in a week your present demand will decrease) Population: Changes (increase/decrease) in population will affect the demand for certain goods. Population: Changes (increase/decrease) in population will affect the demand for certain goods. Consumer Tastes and Advertisement: What is in style (fads in clothing, food, etc., ) Consumer Tastes and Advertisement: What is in style (fads in clothing, food, etc., )

The demand curve for one good may be affected by the changes in demand of another good The demand curve for one good may be affected by the changes in demand of another good Two types of related goods that interact this way: Two types of related goods that interact this way: Complements Complements: Two goods that are bought and used together. Skis & Ski boots ( an increase in the price of one will result in the decrease in demand for the other because one item is useless without the other) Substitutes Substitutes: Goods used in place of one another Buying snowboards as a substitute for skis because the price of skis has increased. Retrieved from: http://www.ers.usda.gov/amber-waves/2013- february/substitute-and-complementary-foods-are-important-when- assessing-impacts-of-price-policies-on-dietary-quality.aspx#.VKb_5XtkaPQhttp://www.ers.usda.gov/amber-waves/2013- february/substitute-and-complementary-foods-are-important-when- assessing-impacts-of-price-policies-on-dietary-quality.aspx#.VKb_5XtkaPQ

Section Three Elasticity of demand

Elasticity of Demand Elasticity of Demand Inelastic Inelastic Elastic Elastic Total revenue Total revenue Retrieved from: https://www.onlinetexts.comhttps://www.onlinetexts.com

Are their certain products you could not do without? List three in your notes How would your list change if the prices of each doubled or even quadrupled? Are there some things in your list you can and cannot do without? Retrieved from: http://economiclolo.blogspot.com/2013/07/price-elasticity-of-demand.htmlhttp://economiclolo.blogspot.com/2013/07/price-elasticity-of-demand.html

Elasticity of demand: Elasticity of demand: A measure of how consumers react to a change in price. Two types to consider: Inelastic Inelastic : Demand that is not very sensitive to a change in price Example: Something you will keep buying no matter the change in price Elastic Elastic : Demand that is sensitive to a change in price Example: Something you will buy less of in the event of a price increase Retrieved from: http://www.econs.com.sg/free-downloads/elasticity/http://www.econs.com.sg/free-downloads/elasticity/

Total Revenue: The total amount of money a firm receives by selling goods or services. Determined by two factors: 1) The price of the goods; 2) the quantity sold. Retrieved from: http://ingrimayne.com/econ/elasticity/RevEtDemand.htmlhttp://ingrimayne.com/econ/elasticity/RevEtDemand.html