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Chapter 4 The Law of Demand Demand- the willingness Demand- the amounts of to buy a good or service and the ability to pay for it. Demand is also desire for a good/service but you hafta pay for it a product consumers are willing and able to purchase at each price _______ is the major factor that influences demand The Law of Demand States that when prices go down, quantity demanded increases. When prices go up quantity demanded decreases. P P Q Q This is an inverse or negative relationship Demand Schedule Is a listing of how much of an item an individual is willing to purchase at each price. Basically it’s a table Market Demand Schedule Is a listing of how much of an item all consumers are willing to to purchase at each price. How do we get these numbers? Lets do one. Demand Curves Graphically show the data from a demand schedule Market demand curve-same as above only for a market Vera Wang Frustrated when she couldn’t find the wedding dress she wanted. Created her own style of wedding dresses- more sophisticated gowns (no puffed sleeves or lace flounces) Celebrities She created a demand for these sophisticated style dresses Top wedding dress maker in the country Why do demand curves slope downward? Law of diminishing marginal utility- the marginal benefit of using each additional unit of a product during a given period will decline. Or- each buyer get less and less satisfaction from another unit consumer- so price must fall for consumers to want to buy more. Break it down: Marginal= one more Utility= satisfaction Patterns of consumer behavior Income effect- the change in the amount consumers buy because their income changes Or- a lower price increases the purchasing power of a buyers money--so you can afford to buy more- the dollar goes farther. Exs? Buy more books at 7 dollars than 15. (feel $8 richer) Patterns of behavior Substitution effect- buying a substitute good when the item you originally wanted is more expensive. Buy a magazine b/c the hardback book cost was too high Give ‘em some examples Change in Demand Occurs when something (determinants of demand) prompts consumers to buy different amounts at every price. Shifts the demand curve right or left Ex. High unemployment prompts consumers to by less goods at each price level. Shifts Shift to the left___________ Shift to the right__________ Change in Quantity Demanded Is an increase or decrease in the amount demanded because of a change in price. This is just a move from one point to another on the demand curve We are NOT moving the curve Income -----Yeah Money Income changes peoples ability to buy things (goods/services) Snow remover-get less snow- smaller paycheck- can’t buy as many baseball cards ----Demand curve shifts to the ________? Some goods… Normal goods- goods that consumers demand more of when their incomes rise Luxury cars Examples? Inferior goods- goods that consumers demand less of when their incomes rise Examples? Ramen noodles Number of Buyers (Market Size) The number of consumers increases or decreases the demand The more people in a market or area of the country the demand for products generally goes up Baby boom- retirement communities increased Consumer Tastes and Preferences Popular goods are in high demand Unpopular goods that aren’t cool are demanded less Tastes change quickly Clothing (What’s In) Consumer Expectations (Expected Prices) Your expectations of how much a product will cost in the future determines if you buy it now or later. Expectations that gas will be going up leads to people trying to “beat” the price rise which increases demand. Substitute Goods Are goods and services that can be used in place of each other. Products are interchangeable An increase in the price of one good will increase the demand for the second good (substitute) Example…. Ben & Jerry’s and Blue Bunny Ice cream Complementary Goods Goods that are used together, so a rise in demand for one increases the demand for the other If the price of one product changes, demand for both products will change in the same way. They go together Cd’s and CD players Some add another determinant Environmental, timing, or season Time of the year affects demand Christmas trees in July Snow blowers in FL Determinants of Demand TIN-SE In the night pumpkins explode Others???????? Incomes Number of Buyers Tastes/preferences Consumer expectations/ Expected prices Price of related goods (Complements/Substitutes) That’s It Ya’ll Elasticity of Demand- a measure of how responsive consumers are to price changes Markets are sensitive to changes in price, but not all increases in price result in a decrease in demand. Demand is Elastic if quantity demanded changes significantly as price changes. ◦ The more responsive to change the market is the more likely the demand is elastic. Demand is Inelastic if quantity demanded changes little as price changes. ◦ Change in price have little impact on the quantity demanded. How in the world can I remember elastic and inelastic?????????? Think a rubber band….. When the quantity demanded increases by a lot, the demand is elastic and the rubber band stretches. Quantity demanded barely changes—demand is inelastic and rubber band stretches very little. Goods that have a lot of substitutes are elastic ◦ Why? Elastic--? Inelastic--? ◦ Food ◦ Insulin ◦ NE football tickets Elasticity of demand for products can change If we get more substitutes, then, demand might become more elastic. ◦ Cell service –more elastic with more providers Products are withdrawn, then, there is less to choose from & demand becomes inelastic. P Inelastic- looks like an I Elastic- :looks like an E D P D C C Demand is unit elastic when the percentage change in price and quantity demanded are the same. If the price goes up 10% then the quantity demanded will drop exactly 10 % No good or service is ever really unit elastic 1. Substitute goods or services? ◦ No substitute demand tends to be inelastic ◦ Many substitutes tends to be elastic 2. Proportion of Income ◦ The percentage of your income that is spent on goods/services affects elasticity ◦ Ex. Photography=hobby ◦ If the price of camera chips, and fancy lenses goes up, then, you probably won’t spend money on itelastic ◦ But if the price of pencils, or pens rose, you still would buy what you need for school-inelastic 3. Necessity Versus Luxuries Demand for necessities tend to be inelastic ◦ But people don’t always buy the same quantities they may use substitutes Luxuries are not essential to your life ◦ Luxury demand tends to be elastic Total Revenue- a company’s income from selling its products Total Revenue Test- a method of measuring elasticity by comparing total revenues. Total Revenue= PxQ A drop in a business’s total revenue from a price increase indicates elastic demand. Changing movie ticket prices from $4 to $5. • • A rise in a business’s total revenue because of a price increase indicates inelastic demand. Say the ticket prices went from $3 to $4.