PRICE DEMAND SIDE MICROECONOMICS QUANTITY Terms to know
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PRICE DEMAND SIDE MICROECONOMICS QUANTITY
Terms to know • Market Economy • Market Demand Curve • Demand Schedule • Marginal Utility • Demand Curve • Diminishing Marginal Utility – System in which the consumers and firms make all economic decisions – A table that lists how much of a product consumers will buy at all possible prices – Curve (line) that shows the quantities demanded at all possible prices • Law of Demand – Rule stating that consumers will buy more of a product at lower prices and less at higher prices – Curve that shows how much of a product all consumers will buy at all possible prices – Additional satisfaction a consumer gets from having one more unit of a product – Decrease in satisfaction from having one more unit of the same product
WHAT, HOW AND FOR WHOM? ONLY TWO VARIABLES ARE USED IN DETERMINING DEMAND 1. Price 2. Quantity
Demand Schedule Price Of A CD Quantity Demanded for that CD $30 0 $25 0 $20 1 $15 3 $10 5 $5 8
DEMAND CURVE P P=PRICE Q=QUANTITY Q
Understanding the Curve How do we get the demand curve to look the way it does? • The higher the price the less quantity you would purchase. • Demand Curve should ALMOST ALWAYS look something like this. Price D 1 Quantity
LAW OF DEMAND The inverse relationship (demand goes up when prices go down) is almost a given Common sense and simple observation are consistent with this concept
Market Demand Curve Individual Demand Curve Group or Market Demand Curve P P D 1 MD 1 Q Q
Utility Marginal Utility Diminishing Marginal Utility • The reason we buy a product is because we feel it will be useful • Having that Krispy Kreme Donut hmmmm!!!!!! • The extra satisfaction we get from using or obtaining that additional product is not as beneficial • Having your 12 th Krispy Kreme Donut AUGGGGGGHHH!
Factors of Demand
Quantity Demanded • Change in QD – Is a movement ALONG the demand curve Decrease in quantity demanded • What Causes these changes – Income – Substitution Effect Increase in quantity demanded
Income Effect Prices of Goods Drop = More disposable income Disposable means “extra” This happens only when the change occurs in the price of the product
Example: IPods are widely available so the cost of CDs went from $15 to $10 per CD. As a consumer you were willing to buy 6 CDs at the $15 price range but now you are willing to buy 10 for $10. Point A means you spent $90 (6 X $15) By dropping the price to $10 you would spend $60 (6 X$10) which gives you a $30 surplus in cash to either buy more CDs or to spend on something else A B
Substitution Effect The idea of finding something that is cheaper to replace the more expensive item Whenever the price changes and it affects how much you would buy it is a quantity change and a shift along the curve.
Change in Demand • Factors that change the demand curve without the price changing. This causes the entire demand curve to shift. – Consumer Income – Consumer Tastes – Substitutes – Complements – Expectations – Number of Consumers
What Happens? Decrease in demand Increase in demand D 1 D 2 D 1
Consumer Tastes What can change tastes: Advertising Fashion Trends Different Seasons Example: As a product becomes more popular more people want that item and buy more of it and the opposite is true if less popular. Think of Toyota cars D 1 D 2
Substitution • An item that can be used instead of another item and give the same results • Example: – My. Space was a hugely successful social networking site. When Face. Book came unto the scene and became more popular people started to leave My. Space. D 1 D 2
Complement • When one good can effect the use of another • Example: – Play Station and games. If the price of the Play Station goes down people would buy more games to complement it.
Expectations What consumers feel could happen to a product Example: A new technological break through in TV (Think 3 D) Some consumers may hold off buying a TV until that new technology is available
Number of Consumers • Changes in the amount of people that determine the market demand curve • Example: If more people entered the market for new cars it would change the average and shift the curve
ELASTICITY
Demand Elasticity • Three Types of Elasticity – Elastic Demand • When change in price causes a relatively larger change in quantity demanded – Inelastic Demand • Change in price causes a relatively smaller change in quantity demanded – Unit Elastic Demand • Change in price causes a proportional change in quantity demanded
Elastic Demand Expenditure $6=$3 per 2 units
Inelastic Demand Expenditure: $6=$3 per 2 units
Unit Elastic Demand Expenditure: $6=$3 per 2 units Expenditure: $6=$2 per 3 unites
Determining Elasticity Type of Demand Elastic Inelastic Unit Elastic Change in Price Change in Expenditure No Change
Determinants of Demand Elasticity 1. Can the purchase be delayed? 2. Are adequate substitutes available? 3. Does the purchase use a large portion of income?
Example of Products Determinates Fresh of Elasticity Veggies If yes: E If no: IE Can it be delayed? Adequate Substitutes? Large portion of income? Type Table Salt Gas from BP Gas in general Services of medical doctors Insulin Yes No No No Yes No No Elastic No Yes Inelastic Elastic Yes Inelastic No Butter Yes No Inelastic Elastic
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