DEMAND Chapter 4 The Law of Demand Demand

DEMAND Chapter 4

The Law of Demand �Demand- the willingness to buy a good or service and the ability to pay for it. �Demand is also desire for a good/service but you hafta pay for it �Demand- the amounts of a product consumers are willing and able to purchase at each price �_______ is the major factor that influences demand

The Law of Demand �States that when prices go down, quantity demanded increases. When prices go up quantity demanded decreases. �P �P Q Q �This is an inverse or negative relationship

Demand Schedule �Is a listing of how much of an item an individual is willing to purchase at each price. �Basically it’s a table

Market Demand Schedule �Is a listing of how much of an item all consumers are willing to to purchase at each price. �How do we get these numbers? �Lets do one.

Demand Curves �Graphically show the data from a demand schedule �Market demand curve-same as above only for a market

Vera Wang �Frustrated when she couldn’t find the wedding dress she wanted. �Created her own style of wedding dresses- more sophisticated gowns (no puffed sleeves or lace flounces) �Celebrities �She created a demand for these sophisticated style dresses �Top wedding dress maker in the country

Why do demand curves slope downward? �Law of diminishing marginal utility- the marginal benefit of using each additional unit of a product during a given period will decline. �Or- each buyer get less and less satisfaction from another unit consumer- so price must fall for consumers to want to buy more. �Break it down: �Marginal= one more �Utility= satisfaction

Patterns of consumer behavior �Income effect- the change in the amount consumers buy because their income changes �Or- a lower price increases the purchasing power of a buyers money--so you can afford to buy more- the dollar goes farther. �Exs? �Buy more books at 7 dollars than 15. (feel $8 richer)

Patterns of behavior �Substitution effect- buying a substitute good when the item you originally wanted is more expensive. �Buy a magazine b/c the hardback book cost was too high �Give ‘em some examples

Change in Demand �Occurs when something (determinants of demand) prompts consumers to buy different amounts at every price. �Shifts the demand curve right or left �Ex. High unemployment prompts consumers to by less goods at each price level.

Shifts �Shift to the left______ �Shift to the right_____

Change in Quantity Demanded �Is an increase or decrease in the amount demanded because of a change in price. �This is just a move from one point to another on the demand curve �We are NOT moving the curve

Income -----Yeah Money �Income changes peoples ability to buy things (goods/services) �Snow remover-get less snow- smaller paycheck- can’t buy as many baseball cards ----Demand curve shifts to the ____?

Some goods… �Normal goods- goods that consumers demand more of when their incomes rise �Luxury cars �Examples? �Inferior goods- goods that consumers demand less of when their incomes rise �Examples? �Ramen noodles

Number of Buyers (Market Size) �The number of consumers increases or decreases the demand �The more people in a market or area of the country the demand for products generally goes up �Baby boom- retirement communities increased

Consumer Tastes and Preferences �Popular goods are in high demand �Unpopular goods that aren’t cool are demanded less �Tastes change quickly �Clothing (What’s In)

Consumer Expectations (Expected Prices) �Your expectations of how much a product will cost in the future determines if you buy it now or later. �Expectations that gas will be going up leads to people trying to “beat” the price rise which increases demand.

Substitute Goods �Are goods and services that can be used in place of each other. �Products are interchangeable �An increase in the price of one good will increase the demand for the second good (substitute) �Example…. �Ben & Jerry’s and Blue Bunny Ice cream

Complementary Goods �Goods that are used together, so a rise in demand for one increases the demand for the other �If the price of one product changes, demand for both products will change in the same way. �They go together �Cd’s and CD players

Some add another determinant �Environmental, timing, or season �Time of the year affects demand �Christmas trees in July �Snow blowers in FL

Determinants of Demand �TIN-SE �In the night pumpkins explode �Others? ? ? ? �Incomes �Number of Buyers �Tastes/preferences �Consumer expectations/ Expected prices �Price of related goods (Complements/Substitutes)

That’s It Ya’ll

Section 3 Elasticity of Demand

Elasticity of Demand � Elasticity of Demand- a measure of how responsive consumers are to price changes � Markets are sensitive to changes in price, but not all increases in price result in a decrease in demand.

Elasticity of Demand � Demand is Elastic if quantity demanded changes significantly as price changes. ◦ The more responsive to change the market is the more likely the demand is elastic. � Demand is Inelastic if quantity demanded changes little as price changes. ◦ Change in price have little impact on the quantity demanded.

How to remember? � How in the world can I remember elastic and inelastic? ? ? ? ? � Think a rubber band…. . � When the quantity demanded increases by a lot, the demand is elastic and the rubber band stretches. � Quantity demanded barely changes—demand is inelastic and rubber band stretches very little.

Real life examples? ? ? � Goods elastic that have a lot of substitutes are ◦ Why? � Elastic--? ◦ Food � Inelastic--? ◦ Insulin ◦ NE football tickets

Elasticity continued � Elasticity of demand for products can change � If we get more substitutes, then, demand might become more elastic. ◦ Cell service –more elastic with more providers � Products are withdrawn, there is less to choose from & demand becomes inelastic.

Here’s a picture

How to remember it? � Inelastic- looks like an I � Elastic- : looks like an E P D C C

Unit Elastic � Demand is unit elastic when the percentage change in price and quantity demanded are the same. � If the price goes up 10% then the quantity demanded will drop exactly 10 % � No good or service is ever really unit elastic

What determines elasticity? Factors/determinents � 1. Substitute goods or services? ◦ No substitute demand tends to be inelastic ◦ Many substitutes tends to be elastic

What determines elasticity � 2. Proportion of Income ◦ The percentage of your income that is spent on goods/services affects elasticity ◦ Ex. Photography=hobby ◦ If the price of camera chips, and fancy lenses goes up, then, you probably won’t spend money on itelastic ◦ But if the price of pencils, or pens rose, you still would buy what you need for school-inelastic

What determines elasticity � 3. Necessity Versus Luxuries � Demand for necessities tend to be inelastic ◦ But people don’t always buy the same quantities they may use substitutes � Luxuries are not essential to your life ◦ Luxury demand tends to be elastic

How to figure Elasticity of Demand � Total Revenue- a company’s income from selling its products � Total Revenue Test- a method of measuring elasticity by comparing total revenues. � Total Revenue= Px. Q

Total Revenue Continued �A drop in a business’s total revenue from a price increase indicates elastic demand. � Changing movie ticket prices from $4 to $5. • • A rise in a business’s total revenue because of a price increase indicates inelastic demand. Say the ticket prices went from $3 to $4.