the law of demand - BTHS World History
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Transcript the law of demand - BTHS World History
THE LAW OF DEMAND
THE LAW OF DEMAND
The quantity demanded is the amount of a good that
consumers are willing and able to purchase at a particular
price over a given period of time.
There are two distinct reasons why a consumer buys less of a
good after its price increases: the substitution effect and the
income effect.
The substitution effect arises when an increase in the price of a good
causes a consumer to switch away from that good and toward other
goods that do not experience a price increase.
Likewise, a decrease in the price of a good causes consumers to switch
toward that good.
THE LAW OF DEMAND
The quantity demanded is the amount of a good that
consumers are willing and able to purchase at a particular
price over a given period of time.
There are two distinct reasons why a consumer buys less of a
good after its price increases: the substitution effect and the
income effect.
The income effect is the change in consumption
that occurs when a price increase causes
consumers to feel poorer or when a price
decrease causes them to feel richer.
THE LAW OF DEMAND
THE LAW OF DEMAND AND THE
“ALL ELSE EQUAL” ASSUMPTION
Economists use the Latin term ceteris paribus,
meaning “all else equal,” to indicate that they
are looking only at a specified relationship, such
as the one between price and quantity
demanded.
THE DEMAND SCHEDULE &
THE DEMAND CURVE
A demand schedule is a table that relates the quantity
demanded of a particular good to its price.
INDIVIDUAL DEMAND SCHEDULE
& THE DEMAND CURVE
A demand curve is a graphical representation of the demand
schedule for a good, showing the quantity demanded at each
price.
THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by ALL
consumers in the market varies with the price.
THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by ALL
consumers in the market varies with the price.
THE DEMAND SCHEDULE
& THE DEMAND CURVE
The market demand curve for a good is a graphical
representation of how the quantity demanded by all
consumers in the market varies with the price.
MOVEMENTS ALONG A
DEMAND CURVE
A movement along a demand curve caused by a price
change is called a change in the quantity demanded,
not to be confused with a change in demand.
SHIFTS OF THE
DEMAND CURVE
A shift of the
demand curve
represents a change
in the amount people
are willing and able
to buy at every price.
SHIFTS OF THE
DEMAND CURVE
SHIFTS OF THE
DEMAND CURVE
WHAT CAUSES THE
DEMAND CURVE TO SHIFT?
All of the following shift the demand curve:
•
Tastes and preferences
–
•
More popular demand shifts right
Income (if income increases)
- normal good (the demand shifts right)
- inferior good (the demand shifts left)
If more people demand a good, the price will increase.
WHAT CAUSES THE
DEMAND CURVE TO SHIFT?
All of the following shift the demand curve:
•
•
Tastes and preferences
Income
- normal good
- inferior good
The Prices of Related Goods (if the price increases)
- substitute goods (demand will increase)
- complementary goods (demand will decrease)
WHAT CAUSES THE DEMAND
CURVE TO SHIFT?
All of the following shift the demand curve:
•
•
Tastes and preferences
Income
- normal good
- inferior good
• The Prices of Related Goods
- substitute goods
- complementary goods
• Expectations (a predicted shortage will increase demand)
WHAT CAUSES THE DEMAND
CURVE TO SHIFT?
All of the following shift the demand curve:
•
•
•
•
•
Tastes and preferences (more popular demand shifts right)
Income (if income increases)
- normal good (the demand shifts right)
- inferior good (the demand shifts left)
The Prices of Related Goods (if the price increases)
- substitute goods (demand will increase)
- complementary goods (demand will decrease)
Expectations (a predicted shortage will increase demand)
The Number of Buyers (more buyers increases demand)
WHAT IS ELASTICITY?
Elasticity of demand is a measure of how strongly consumers
respond to a change in the price of a good, calculated as the
percentage change in the quantity demanded divided by the
percentage change in price.
•
•
•
Demand is elastic if consumers respond to a change in PRICE
with a relatively large change in the quantity demanded
Demand is inelastic if consumers respond to a change in PRICE
with a relatively small change in the quantity demanded.
Demand is unit-elastic if consumers respond to a change in
price by changing the quantity demanded by the same
percentage.
WHAT MAKES DEMAND
MORE OR LESS ELASTIC?
• Necessities versus luxuries: If you need it, your
demand is relatively inelastic.
• The availability of close substitutes: No substitutes
means your demand is inelastic.
• The share of income spent on the good: If It is a large
expense, your demand is elastic.
• Time: If you can wait, your demand is elastic.
Perfectly Elastic Demand
Perfectly Inelastic Demand
PREDICTING ELASTICITY
COMPARING ELASTICITIES
By calculating the value of elasticity, economists can
categorize the demand for goods according to how
sensitive consumers are to price changes.
We can specify whether demand is elastic, inelastic, or
unit elastic, depending on the value of elasticity.
The larger the elasticity, the greater the percentage
change in quantity demanded relative to the
percentage change in price and the stronger the
response to a price change.
COMPARING ELASTICITIES
SPENDING, REVENUE,
AND ELASTICITY
ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Total revenue is all the money consumers spend on
a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.
Changes in Total Revenue with Elastic Demand
Price increases = total revenue decreases
Price decreases = total revenue increases
ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Total revenue is all the money consumers spend on
a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.
Changes in Total Revenue with Inelastic Demand
Price increases = total revenue increases
Price decreases = total revenue decreases
ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Total revenue is all the money consumers spend on
a good, and firms receive for a good, during a
particular period of time: it is the price of the good
multiplied by the quantity of the good sold.
Constant Total Revenue with Unit-Elastic Demand
Price increases or decreases = total revenue
unchanged.
ELASTICITY, TOTAL SPENDING,
& TOTAL REVENUE
Changes in Total Revenue with Elastic Demand
Changes in Total Revenue with Inelastic Demand
Constant Total Revenue with Unit- Elastic Demand