Transcript chapter 4 section 1 Law of demand

Economics, Unit 4
Chapter 4
Demand
Activating Question
• When you prepare to buy something,
what influences your decision the most?
Demand
– The desire to own something and the ability
to pay for it.
– When a good’s price is lower, consumers will
buy more and when a good’s price is higher,
consumers will buy less of it.
– Whether your income is $10.00 or $10,000,000,
the price of a good will strongly influence
your decision to buy.
– Example: Would you buy a slice of pizza for
$1.00? $2.00? $10.00?
Law of Demand
– It is a result of two separate behavior patterns
that overlap.
– They explain why an increase in price
decreases quantity of purchases.
– These two behavior patterns are: Substitution
Effect and Income Effect.
Substitution Effect
– When a consumer reacts to a rise in price of
one good by consuming less of that good and
more of a substitute good.
– OR Price drops and a good becomes cheaper,
consumers will buy more causing quantity of
the good demanded to rise.
– Example: Price of pizza , , so buy tacos
instead
– Price of pizza , buy less tacos & more pizza
Income Effect
– Rising prices makes us feel poorer so we cut back on
purchases of some goods. We buy fewer slices of pizza
AND we do NOT substitute other goods.
– NOTE: Economists measure consumption in the amount
of a good that is BOUGHT, NOT the amount of money
spent to buy it.
Complete this chart with
Income effect
Substitution
Effect
Combined
Effect
Price of Pizza
Increases
Price of Pizza
Decreases
Consumption of:
Consumption of:
Pizza
Pizza
Tacos
Tacos
Building the Law of Demand
Price of Pizza
Increases
Price of Pizza
Decreases
Consumption of:
Consumption of:
Pizza
Tacos
Pizza
Income effect
↓
↓
↑
↑
Substitution
Effect
↓
↑
↑
↓
Combined
Effect
↓
↕
↑
↕
Tacos
Demand Schedules
– To have demand for a good, you must be
willing and able to buy it at the specified
price.
– You want the good and can afford it.
– If you want a car, and can’t truly afford it,
then you do NOT demand it Sorry.
– A Demand Schedule show the good that a
person will purchase at each price in a
market.
Pizza Demand Schedule
Me
aka Individual Demand
Schedule
Price per
slice
How many
slices I want
per day
My Class
Aka Market Demand
Schedule
Price per
slice
.50
.50
1.00
1.00
1.50
1.50
2.00
2.00
2.50
2.50
3.00
3.00
Quantity
demanded
per day
Demand Curves
• If take your demand schedule graph
from the previous slide and plot it, you
will have created a DEMAND CURVE.
• Y-axis: Price per slice (in dollars)
start at 0 and go up to $3.00
• X-axis: Slices per day (0 – 5)
• Try it.
Demand Curves
• The graph shows the relationship
between price of one good and quantity
a person will purchase ALL other factors
held constant (price of other goods,
your income, quality of pizza)
• The graph curves down to right. Why?
Demand Curve Limitations
• Used to predict how ppl will change
their buying habits when price of a good
rises or falls.
• ONLY accurate for one very specific set
of market conditions. Example: nearby
factory closes, less ppl at lunch, sell
less pizza even though price is the
same.
Question
• Which of the following is plotted on the
vertical axis of a demand curve?
A. Demand schedule
B. Price
C. Quantity
D. Market demand schedule
Homework
• Page 83, #’s 5 and 6
• Freyer Model: demand, substitution
effect and income effect