The Law of Demand What is Demand Quantity
- Slides: 31
The Law of Demand
What is Demand? § Quantity demanded of a product or service is the number that would be bought by the public at a given price
The Law of Demand § When a good’s price is lower, consumers will buy more of it § When a good’s price is higher, consumers will buy less of it
The Law of Demand § The Law of Demand is affected by two behavior patterns § The Substitution Effect § The Income Effect
The Substitution Effect § As the price for one good rises compared to a similar good, consumers will substitute the similar good for their purchases.
The Income Effect § As prices go up, your money becomes worth less than it was worth before § People are less likely to buy the good now
Demand Schedule § A demand schedule shows the likely number of purchases based on a series of arbitrarily chosen prices
Demand Schedule
Demand Schedule › Demand Curve
A Change (Shift) in Demand § If one of 5 other factors changes, the entire demand curve will shift to the left or right § The curve does NOT shift if the price of the good is the only change
A Change in Demand (Graph)
A Change in Quantity Demanded (Graph)
Income § When people’s income changes, demand shifts accordingly § Normal Goods – § Higher income = higher demand § Lower income = lower demand
Income § When people’s income changes, demand shifts accordingly § Inferior Goods – § Higher income = lower demand § Lower income = higher demand
Consumer Expectations § If consumers expect a price to rise in the future, current demand increases § If consumers expect a price to fall in the future, current demand decreases
Population § When one sector of the population grows, demand increases for products that sector uses § Fastest growing sector of the population today?
Consumer Tastes and Advertising § Increased advertising can increase consumer demand § Bad news about a product can decrease demand
Price of Related Goods § Complimentary Goods – goods that are bought and used together § Higher Complementary Price = decrease in demand § Lower Complementary Price = increase in demand
Price of Related Goods § Substitute Goods – goods that are used in place of one another § Higher Substitute Price = increase in demand § Lower Substitute Price = decrease in demand
Elasticity of Demand § Elasticity refers to how responsive the quantity demanded is to a change in prices
Elasticity of Demand § An inelastic good will still sell about the same quantity even if the price goes up or down
Elasticity of Demand § An elastic good will have a higher change in Qd when there is a price change
Calculating Elasticity § Elasticity = % change in quantity demanded _____________ % change in price
Calculating Elasticity § If Elasticity is < 1, the good is inelastic § If Elasticity is > 1, the good is elastic § If Elasticity = 1, the good has a unitary elastic demand
Factors Affecting Elasticity § Availability of Substitutes – if you have no other options, demand is inelastic.
Factors Affecting Elasticity § Availability of Substitutes – if you have equally appealing options, demand is highly elastic
Factors Affecting Elasticity § Relative Importance – what percentage of your budget is spent on the good? § If it is low, price changes will not alter demand § If it is high, even small price changes can greatly affect demand
Factors Affecting Elasticity § Necessities vs. Luxuries – consumption of milk might stay the same with price changes, while consumption of lobster would greatly change with price changes
Factors Affecting Elasticity § Change over time – price changes may produce inelastic demand in the short term, but elastic demand long term § 1970 s fuel crisis – people still bought the same amount of gas at first, but eventually started buying smaller cars
Elasticity and Revenue § Total Revenue – the amount of money a company receives by selling its good or service § With elastic demand, revenue will decrease greatly with price increases
Elasticity and Revenue § With Inelastic demand, price increases will increase revenue
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