Transcript Demand - cloudfront.net

Demand
Demand = the ability and desire
of consumers to buy a good (the
desire to own something and the
ability to pay for it)
The Law of Demand
Consumers buy more of a good when its
price decreases and less when its price
increases
Example: If the price of pizza rises, people
will buy fewer slices
Law of Demand
• The law of demand is the result of two
separate patterns of behavior that overlap:
the substitution effect and the income
effect
The Substitution Effect
When consumers react to an increase in a
good’s price by consuming less of that
good and more of other goods (and viceversa)
Example of Substitution Effect
• Consumers purchase tacos and salads
instead of pizza because they are less
expensive
The Income Effect
• Takes place when a consumer responds
to a price increase by spending more on
that good, even though it is more
expensive (they spend more, but usually
buy less)
Example of Income Effect
• If you bought fewer slices of pizza without
increasing your purchases of other foods
(makes us feel poorer)
Demand Schedules and Curves
• A demand schedule is a table that lists
the quantity of a good that all consumers
in a market will purchase at each different
price
• A demand curve is a graphic
representation of a demand schedule
Shifts of the Demand Curve
• In reality, factors other than price affect the
demand for the pizza (and any other good)
• A demand curve is accurate only as long
as everything else besides price stays the
same
• Example: decrease in the price of pizza
leads to an increase in the quantity
demanded (and vice-versa)
Shifts of the Demand Curve
• When other factors besides price change,
we no longer move along the demand
curve
• Instead, the entire demand curve shifts
Shifts of the Demand Curve
• This means that at every price, consumers
buy a different quantity than before
• Economists refer to this shift of the entire
curve as a change in demand
What Causes a Change in Demand
(Shift of the Demand Curve)?
• -NOT price!!!
• Five factors can lead to a change in
demand rather than simply a change in the
quantity demanded
1. Income
-Most items that we purchase are normal
goods-goods that we purchase when our
income increases
1. Income
•
-There are also other goods called
inferior goods-an increase in income
causes demand for these goods to fall
(goods that you would buy in smaller
quantities, or not at all, if you could afford
something better)
Examples of Inferior Goods
• Macaroni and cheese
• Generic cereals
• Used cars
2. Consumer Expectations
• Our expectations about the future can
affect our demand for certain goods today
2. Consumer Expectations
• If you expect the price of a good to rise,
your current demand will rise, which
means you will buy the good sooner. If you
expect the price to drop, your current
demand will fall and you will wait for the
lower price (ex: a bike on sale in a week)
3. Population
• Changes in the size of the population will
also affect the demand for most products
3. Population
• Example: The American soldiers who
returned from World War II in the mid-to
late 1940s married and started families in
record #s (“baby boom”); this led to higher
demand for baby clothes, schools, etc. in
the 1950s and 1960s
4. Consumer Tastes and
Advertising
• Although economists cannot always figure
out the reasons why some fads begin,
advertising and publicity often play an
important role
4. Consumer Tastes and
Advertising
• This is where advertising comes into play
• Companies spend money on advertising
because they hope it will increase the
demand for the goods they sell
5. Prices of Related Goods
• The demand curve for one good can be
affected by a change in the demand for
another good. There are two types of
related goods that interact this way:
complements and substitutes
Complements
• Complements are two goods that are
bought and used together
• Example: skis and ski boots
• An increase in the price of ski boots will
cause people to buy fewer boots. Because
skis are useless without boots, the
demand for skis will fall at all prices
Substitutes
• Substitutes are goods used in place of
one another
• Example: skis and snowboards
• A rise in the price of snowboards will
cause people to buy fewer snowboards
and more pairs of new skis at every price
because consumers will buy one or the
other, but not both (snowboards are a
substitute for skis)