Transcript The law of demand

The law of demand
What is the law of demand?
How do income and the law of diminishing
marginal utility apply to demand?
What’s the difference between the change in
quantity demanded and a change in demand?
What causes a change in demand?
Gut Check!
• What is demand?
Amount of a g/s consumers are willing & able to buy at all
prices in a given period.
• What is quantity demanded?
Amount of g/s consumers are willing & able to buy at a
specific price.
• What is the relationship between quantity demanded and
price in a market?
As price increases, quantity demanded decreases
– How do we show this relationship?
– Using a demand curve (shows how price influences qd)
The law of demand
The law of demand: there is an inverse
relationship between the price of a g/s and
the quantity demanded by consumers.
– This makes sense to us: When a g/s goes on
sale, consumers buy (demand) more because
the price is reduced.
Why do price and qd move in
opposite directions?
• The law of diminishing utility
“thinking at the margin” principle tells us consumers choose not
whether to buy, but how much to buy. This raises the question of
utility: satisfaction in consuming one more item
• The income effect
Scarcity of income means that if the price of a g/s increases, people
won’t be able to buy the same quantity as they did @ original price
• The substitution effect
substitute goods are a type of good that can satisfy the same want
as an “original” good, but often at a lower cost (competition)
– At some point, people will substitute the cheaper good due to
price
– Ex: “Dr. Thunder” rather than Dr. Pepper
Quick, important points
• Diminishing marginal utility, income effect, and
substitution effect cause consumers to react in
predictable ways to a change in price of a g/s
• As consumers buy more (decrease price) or less
(increase price), the qd is said to “move along
the demand curve”
– This is called the change in quantity demanded
– It is only caused by a change in price.
How to show a change
in quantity demanded
• Use a demand
schedule (table of data)
• Then, graph the demand
curve!
• Remember, this graph
would be used for a
change in price only.
• Any change in qd will
be along the curve, not
a new one.
P
QD
How is a change in demand
different?
• A change in demand is due to factors other
than just price of a g/s.
– Remember, a change in quantity demanded is due to
price of one item
– This change happens when quantities demanded
increase or decrease at all prices, not just one.
• The demand curve will shift, or move an entire
curve, to the left (decrease in demand) or to the
right (increase in demand)
Demand Curves:
CD
vs
QD
What can cause a
change in demand?
(“demand shifters”)
• Number of buyers
– Based on increase/decrease in population
• Tastes/preferences
– Fads, fashions, advertising…
• Expectations of buyers
– Depending on what’s currently happening
• Income
• Prices of related goods
What can cause a
change in demand?
• Income
– Normal good: any good for which there is a direct
relationship between changes in income and its
demand curve
• Increase income=purchase more; curve right
• Decrease income=purchase less; curve left
• Ex: new cars, steaks, brand-name products
– Inferior good: any good for which there is an inverse
relationship between changes in income and its
demand curve
• Decrease income=increase in i.g. purchase; curve right
• Increase income=decrease in i.g. purchase; curve left
• Ex: generic brands, used cars, hamburger instead of
steak
What can cause a
change in demand?
• Prices of related goods
– Substitute good: type of good that can satisfy the
same want as an “original” good, but often at a lower
cost—this causes competition for purchases
• Direct relationship between a price change for one good
and the demand for its “competitor” good
– Complementary good: a good that is purchased
along with another
• Inverse relationship between a price change for one
good and the demand for its “go together” good
Quick, important points
• Movement along a
demand curve is ONLY in
response to a change in
the price of one good
(quantity demanded)
• Movement to the left or
right of a demand curve is
usually a result in the
change of one good’s
price as compared to the
price of another (change
in demand)
Mnemonic! (Demand shifters)
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Price (of complements/substitutes)
Income (determines normal/inferior)
Rates of interest
Adverse/good conditions (weather, events)
Tastes/preferences
Expectations (of future markets)
Size of the market (population)