Transcript Ch. 4: Demand

CH. 4: DEMAND
SEC. 1: WHAT IS DEMAND?
THE LAWS OF DEMAND

US has free enterprise economy –
 To
make profit –
 consumers serve own interest by purchasing best
product at lowest possible price
 forces of supply and demand establish price that
serves both
 demand
–
 may
want different things (cruise, house) – but may not
be able to afford

then have no actual demand
 may

want newest CD at $12-$15 – you can afford
then you have a demand for them
 price
is one major factor that influences demand
Law of demand –
 Quantity demanded and price have an inverse,
or opposite relationship

EXAMPLE: PRICE AND DEMAND

Cheryl likes DVD movies,
has a job – some extra
money to spend



wants a $69.95 Star Wars
movie Trilogy – has money
but out of stock
decides to buy others, but
number will depend on
price – wants to save half
of for the trilogy to
purchase next week
Law of demand is a
description of how
consumers behave
DEMAND SCHEDULES

Demand schedule –
 shows

law of demand in chart form
Market demand schedule –
EXAMPLE: INDIVIDUAL DEMAND SCHEDULE

2 column table that
follows a predictable
format



left hand column list
various prices of goods or
services
right hand column shows
the quantity demanded of
the goods or services at
each price
Figure 4.2 shows Cheryl’s
demand for DVD’s
Price per DVD
Quantity
Demanded
30
0
25
1
20
2
15
3
10
4
5
7
EXAMPLE: MARKET DEMAND SCHEDULE


Figure 4.2 shows how
many DVD’s Cheryl is
willing and able to buy
at each price in the
market
Shows that quantity of
DVD’s that Cheryl
demands rises and falls
according to price
Price per DVD
Quantity
Demanded
30
50
25
75
20
100
15
125
10
175
5
300


Business owners need
more information than
about 1 consumer
Need a market demand
schedule –


similar to individual
demand schedule except
quantities are much
larger
also shows market
demand depends on
price
Price per DVD
Quantity
Demanded
30
50
25
75
20
100
15
125
10
175
5
300
HOW TO CREATE MARKET DEMAND SCHEDULE

Survey customers
asking how many DVD’s
they would buy at
different prices


review sales figures to
see how many DVD’s
sold at each price
these techniques –
DEMAND CURVES

Demand curve –
 displays

data from an individual demand schedule
Market demand curve –
 shows
the quantity that all consumers or market as
a whole are willing and able to buy at each price
 shows the sum of the information on the individual
demand curve of all consumers in a market
EXAMPLE: INDIVIDUAL DEMAND CURVE



When prices go up, the
quantity demanded
goes down
When prices go down,
the quantity demanded
goes up
Created using the
assumption that all
other economic factors
except price remain the
same
Price
35
30
25
20
Price
15
10
5
0
0 1 2 3 4 5 6 7
EXAMPLE: MARKET DEMAND CURVE

Figure 4.5 shows the
quantity demanded at
different prices




shows inverse relationship
between price and quantity
demanded
price goes down, quantity
demanded goes up
price goes up, quantity
demanded goes down
Curve constructed on the
assumption that all other
economic factors remain
constant – only price
changes
Price
35
30
25
20
Price
15
10
5
0
50 75 100 125 175 300
ECONOMIC PACESETTERS: VERA WANG:
DESIGNER IN DEMAND
B. – June 27, 1949
 In fashion industry 15 years when planning her
own weddingcould not find a dress fashionable
enough for herself

Year following her wedding – decided to fill this need –
make designer wedding dresses
 Celebrities were choosing her dresses – and demand
grew

 other

designers began to create similar dresses
Her style then spread to other products – ready to
wear dresses, perfume, accessories
SEC. 2: WHAT FACTORS AFFECT DEMAND?
MORE ABOUT DEMAND CURVES
Shape of demand curve – why?
 Law of diminishing marginal utility –

Utility is the satisfaction gained from the use of a good
or service
 glass of lemonade – 2nd and 3rd glass less satisfying
then the 1st


Consumers do not want to pay as much for
additional purchases –

consumers will buy more glasses of lemonade if the
price is lower for each addition

Income effect –


if you buy a $7 book rather than a $15 book – you feel
$8 richer – so may buy another book – also works vice
versa
Substitution effect – is the pattern of behavior that
occurs when consumers react to a change in the
price of a good or service by buying a substitute
product – one whose price has not changed and
that offers a better relative value

if paperback books go above $10, consumers might
buy fewer book and more $4 mags
CHANGE IN QUANTITY DEMANDED

Change in quantity
demanded –


each change in quantity
demanded is shown by a
new point of the demand
curve
a change in quantity
demanded does not shift
the demand curve itself
Price
35
30
25
20
Price
15
10
5
0
0 1 2 3 4 5 6 7
EXAMPLE: CHANGES ALONG A DEMAND CURVE

Figure 4.7 – follow
changes on the demand
curve



shows the change for
one person
a market demand curve
provides similar info for
an entire market
have larger quantities
demanded and larger
changes to quantity
demanded
Price
35
30
25
20
Price
15
10
5
0
0 1 2 3 4 5 6 7
CHANGE IN DEMAND
If people lose job – people more likely to spend
limited funds on food and housing than on
entertainment – market demand then drops
 Change in demand –



also called a shift in demand – shifts the position of the
demand curve
6 factors can cause a change in demand: income,
market size, consumer expectations, consumer
taste, substitute goods, and complementary goods
DECREASE
INCREASE
60
60
50
50
40
40
D1
D2
30
20
20
10
10
0
0
0 1 2 3 4 5 6 7
D1
D3
30
0
1
2
3
4
5
6
7
FACTOR 1: INCOME

If income changes – person’s ability to buy
goods and services changes
 market
demand curve affected as well
 income of consumers rise or fall – total demand in
the market usually rise or fall
 market demand curve will shift to the left or the
right
normal goods –
 inferior goods –




Tyler and baseball cards –
works at garden center
In fall, works less hours –
smaller paycheck – less money
to spend – demands fewer bb
cards at every price
Promoted – raise of $2 an
hour – more money to spend –
demand for bb cards increases
– demand curve shifts to the
right


Tyler bought clothes at a
discount store before his raise
– now he spends more
discount clothing – inferior
goods (used books, generic
food products)
FACTOR 2:


Number of consumers ↑or ↓, then market size changes
Tourists come to Montclair (beach town) in summer,
population ↑, demand for pizza will increase





population shifts change the size of markets
ex. – Northeast US – lost population in the last 30 years
why shift – better climate, high-tech jobs, less congested
area
shift to the West and South – increase in those market sizes
Has altered demand from essentials to nonessentials
FACTOR 3: CONSUMER TASTES

Today’s hot trends become tomorrow’s castoffs
 good
with high popularity –
 product loses popularity –

Advertising has a strong influence on consumer
tastes
 sellers
advertise to create a demand for a product
 some will give up perfectly good clothes because
they are convinced the style has changed
FACTOR 4:

Your expectations for the future can affect your
buying habits today
 if
you think the price of a good or service will
change – can affect if you buy now or later
 ex. – people usually wait until end of summer to
buy a car – expect sales
 demand is higher in Aug., expect sales and people
wait until then
FACTOR 5: SUBSTITUTES
Substitutes –
 Products are interchangeable – if price of a
substitute drops, people will choose to buy it
instead of the original



People turn to substitutes if price for original
becomes too high


demand for substitute ↑, demand for original ↓
demand for substitute ↑, demand for original ↓
Substitutes can be used in place of each other

ex. – car, bus, train – if price on one to high, use
another
FACTOR 6: COMPLEMENTS

Complements –
 increase
in demand of one will increase the
demand for the other & vice versa
 products work in tandem with each other
 ex.
– CD & CD players
 if
price for one product changes, demand for both
will change the exact same way
 if
prices rises - demand will drop
 if price drops – demand will rise
ELASTICITY OF DEMAND

Consumer demand is dependent on price – but
price is seldom fixed


Changes in consumer buying habits are tied to
type of goods and services being produced and
how important the good or service is to the
consumer


If prices rise consumers buy less & if prices drop
consumers buy more – not always the case
not all increases in price result in a decrease in
demand
Elasticity of demand –

Elastic –



Inelastic –


the more responsive to change – the more likely the
demand is elastic
elastic goods are price sensitive
case of inelastic demand – changes in price have little
impact on the quantity demanded
A rubber band


when quantity demanded increases – demand is elastic and
rubber band stretches
if quantity barely changes, demand is inelastic and rubber
band stretches very little
EXAMPLE: ELASTICITY OF DEMAND FOR GOODS
AND SERVICES

PDA’s go on sale



price down 20%, quantity
demanded goes up 30% demand is elastic
% change in quantity
demanded is greater than
the % change in price
goods that have a large #
of subs fall into the elastic
category, since if prices
changes, consumers can
get another product
EXAMPLE: ELASTICITY OF DEMAND FOR GOODS
AND SERVICES

Insulin – required by
diabetics



if price rose – they still
need the same amount as
before
if price fell –
result –

Elasticity of demand for
certain products may
change – can happen
vice versa



if there are more subs –
demand may become
more elastic
ex. –
ex. – vice versa –
CURVE FOR ELASTIC AND INELASTIC DEMAND
CURVES LOOK VERY DIFFERENT
Figures 4.13 & 4.14
 Inelastic curve more steep – changes along the
vertical axis are proportionally greater than the
changes along the horizontal axis
 Unit elastic –

demand is said to be this when % change in price and
quantity are the same
 10% increase in price= a 10% drop in quantity
demanded

ELASTIC
INELASTIC
Price
Price
14
300
12
250
10
200
8
Price
6
150
Price
100
4
2
50
0
0
0
4
8 12 16 20
0
23 30 40 80 120
WHAT DETERMINES ELASTICITY?
The factors that determine elasticity are: availability of substitute
goods or services, the proportion of income that is spent on the
good or service, and whether the good or service is a necessity or a
luxury
FACTOR 1: SUBSTITUTE GOODS OR SERVICES

Generally - if there are
no substitutes for a
good or service,
demand for it tends to
be inelastic



ex. –
if there are many
substitutes available –
demands tends to be
elastic
ex. –
FACTOR 2: PROPORTION OF INCOME

The % you spend on a
good or service affects
elasticity


hobby – photography –
Demand for products that
cost little of your income
tend to be inelastic

ex. –If level of income
increases – you are likely to
increase your demand for
some goods or services
FACTOR 3: NECESSITIES VERSUS LUXURIES

Necessity is something you
need: food or water –
demand tends to be inelastic


even if prices rise –
consumers may not buy the
same quantity no matter what
the price


Quantity demand will change
as the law of demand
predicts –



price of milk rises – sub with
cheaper milk or powdered milk
demand for luxuries tends to be
elastic
something you desire, but not
essential
the change in quantity
demanded is much greater
than the change in price
CALCULATING ELASTICITY OF DEMAND

Businesses figure the elasticity of demand to
help them decide whether to make price cuts
 if
demand is elastic –
 if demand is inelastic –

To determine elasticity
 look
at whether the % change in quantity
demanded is greater than the % change in price
MATH FORMULAS – FIGURE 4.16




Step 1: Calculate %
change in quantity
demanded.
Step 2: Calculate %
change in price.
Step 3: Calculate
elasticity
Step 4: If final # is
greater than 1, demand
is elastic, if less than 1,
is inelastic
TOTAL REVENUE TEST

Total revenue –



can measure elasticity by
comparing the total revenue a
business would receive when
offering its products at various
prices
if total revenue ↑after the price
↓, then demand is elastic
why? Seller makes less, but
still sells enough to make up
for lower price


if total revenue ↓after the price
↓, demand is inelastic
a price decrease showed
modest increase in quantity
sold, but not enough to
compensate for lower revenue

Formula



P=
Q=
Total Revenue=P x Q
EXAMPLE: REVENUE TABLE


Figure 4.17 – figure out
whether demand is
elastic or inelastic
Answer:
Price of
Tickets
Quantity
Demanded
per month
Total
Revenue($)
12
1,000
12,000
10
2,000
20,000
8
6,000
48,000
6
12,000
72,000
4
20,000
80,000