understanding demand - Lemon Bay High School
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Transcript understanding demand - Lemon Bay High School
UNDERSTANDING
DEMAND
In a market system, the
interaction of buyers and sellers
determines the price of most
goods as well as what quantity
of a good will be produced
LAW OF DEMAND
When a good’s prices is lower, consumers
will buy more. When the price is higher,
consumers will buy less
The law of demand is the result of two
separate behavior patterns that explain why an
increase in price decreases the quantity
purchased
Substitution effect
Income effect
SUBSTITUTION EFFECT
As the price of a good rises it becomes
more expensive compared to another
good
As a result as the price of one good goes
up the consumers become more likely to
buy a another good as a substitute
Consumers react to a rise in prices of one
good by consuming less of that good and
buying more of another good
What must be true for this to be right?
INCOME EFFECT
Rising prices make us feel poorer. As
prices increase an individuals budgets just
will not buy as much as it once did
Individuals can no longer afford to buy the
same combination of goods
When the price goes up the quantity
demanded goes down
Income effect also is true when prices go
down. When prices go down the quantity
demanded goes up