What Is the Law of Demand The law

What Is the Law of Demand? The law of demand states that consumers buy more of a good when its price decreases and less when its price increases. • The law of demand is the result of two separate behavior patterns that overlap, the substitution effect and the income effect. • These two effects describe different ways that a consumer can change his or her spending patterns for other goods.

• 3 economic concepts help explain the law of demand: 1. Income effect- an increase or decrease in consumer purchasing power caused by a change in price. – Purchasing Power- the amount of income that people have to spend on goods and services. 2. Substitution Effectconsumer’s tendency to substitute a lower price good for a similar 1 that is priced higher. 3. Diminishing marginal utilitythe usefulness of each unit consumed decreases with each additional unit.

The Demand Schedule • A demand schedule is a • A market demand schedule table that lists the is a table that lists the quantity of a good all person will buy at each consumers in a market will different price. buy at each different price. Demand Schedules Individual Demand Schedule Price of a slice of pizza Quantity demanded per day $. 50 $1. 00 $1. 50 $2. 00 $2. 50 $3. 00 5 4 3 2 1 0 Market Demand Schedule Price of a slice of pizza $. 50 $1. 00 $1. 50 $2. 00 $2. 50 $3. 00 Quantity demanded per day 300 250 200 150 100 50

The Demand Curve • A demand curve is a graphical representation of a demand schedule. • When reading a demand curve, assume all outside factors, such as income, are held constant. Price per slice (in dollars) Market Demand Curve 3. 00 2. 50 2. 00 1. 50 1. 00 Demand . 50 0 0 50 100 150 200 250 300 350 Slices of pizza per day

Shifts in Demand • The Law of Demand only works assuming “all other things are held constant. ” • When this assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.

Ch. 4 Section 2 - Shifts of the Demand Curve • Determinants of demand: Factors other than price that influence the amount of demand for a good or service. – Shifts the curve to the right (increase) or the left (decrease).

What Causes a Shift in Demand? • Several factors can lead to a change in demand: 1. Income Changes in consumers incomes affect demand. A normal good is a good that consumers demand more of when their incomes increase. An inferior good is a good that consumers demand less of when their income increases. 2. Consumer Expectations Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good today. 3. Population Changes in the size of the population also affects the demand for most products. 4. Consumer Tastes and Advertising plays an important role in many trends and therefore influences demand.

Prices of Related Goods The demand curve for one good can be affected by a change in the demand for another good. • Complements are two goods that are bought and used together. • Example: skis and ski boots • Substitutes are goods used in place of one another. • Example: skis and snowboards

Product 1 Product 2 1. Pepsi Coke 2. Hamburger Ketchup 3. Hamburger Bean Burrito 4. Computer Flash Drive 5. Pencil Notebook Paper 6. DVDs Video Tapes 7. Headphones IPod Substitute or Complement

Product 1 Product 2 Substitute or Complement 1. Pepsi Coke Substitute 2. Hamburger Ketchup Complement 3. Hamburger Bean Burrito Substitute 4. Computer Flash Drive Complement 5. Pencil Notebook Paper Complement 6. DVDs Video Tapes Substitute 7. Headphones IPod Complement

Fill in the answers to the following questions with (increase/decrease) or (complement/ substitutes. Exp. The price of Big Macs increases causing a decrease in the Big Mac market. Therefore, the demand for Mc Fries decreases because the two items are complements.

1. The cost of Honda Accords decreases, causing ____ in the Honda market. Therefore, the demand for the Toyota Camry (assume they have about the same value) _____ because the two items are_______. 2. The cost of automobile maintenance increases, causing_____ in the maintenance field. Therefore, the demand for public transportation _______because it is______.

1. The cost of Honda Accords decreases, causing increase in the Honda market. Therefore, the demand for the Toyota Camry (assume they have about the same value) decreases because the two items are _substitutes__. 2. The cost of automobile maintenance increases, causing _decrease_ in the maintenance field. Therefore, the demand for public transportation increases_ because it is _a substitute_.

3. The price of movie theater tickets increases, causing ____ in the movie ticket market. Therefore, the demand for movie rentals_____ because the two items are _______. 4. The price of CD players decreases, causing ______ in the CD player market. Therefore, the demand for CDs _____ because they are _______.

3. The price of movie theater tickets increases, causing decrease in the movie ticket market. Therefore, the demand for movie rentals increases because the two items are substitutes. 4. The price of CD players decreases, causing __an increase_ in the CD player market. Therefore, the demand for CDs _increases__ because they are __complements.

Which way would a demand curve shift in the following scenarios? Write “left” or “right” and which determinant of demand caused the shift. 1. Papa John’s Pizza is offering $1 pizzas for students on Monday nights. 2. The government releases a report that Taco Bell’s meat is actually dog food. 3. Susan’s job at Six Flags ends in late October. 4. John has taken a second job. 5. Abercrombie opened a new store dedicated to preteens. 6. The local Pepsi plant has an explosion and has to close, what happens to the demand for Coke? 7. The price of jelly increases 200%, what happens to the demand for peanut butter?

DEMAND HEADLINES • Read the following eight newspaper headlines. In each case decide if the event will cause a change (shift) in the demand for beef in May. If so, determine if it is an increase (right shift) or a decrease (left shift) and tell which of the determinants of demand has caused the shift: • Prices of related goods • Income • Consumer Expectations • Population • Consumer Tastes and Advertising • NOTE: 1 Headline will not lead to a shift in demand instead it will indicate a change in quantity demanded (due to a change in price. )

HEADLINE 1: Price of beef to rise in June • Example: Demand (for beef in May) increases_ because of consumer expectations 2. HEADLINE 2: Millions of foreign immigrants swell the US population Demand _____ because _______ 3. HEADLINE 3: Pork prices drop Demand _____ because _______

4. HEADLINE 4: Surgeon General warns that eating beef can be hazardous to your health Demand ____because______ 5. HEADLINE 5: Beef prices fall; consumers buy more Demand ______ because _________ 6. HEADLINE 6: Real income for Americans drops third month in a row Demand _____because __________

7. HEADLINE 7: Charcoal shortage threatens Memorial Day cookouts Demand ____ because ______ 8. HEADLINE 8: Nationwide fad: The superburger Demand ____because _____