Transcript Demand - Locust Fork High School

Demand
Demand
I. What is Demand?
II. Change in Quantity Demanded
III. Change in Demand
IV. Diminishing Marginal Utility
V. Demand Elasticity
I. What is Demand?
What is Demand?
Demand is more than having the desire
to own a certain product.
Demand is the desire, ability, and
willingness to buy a product.
Economists, however, want to know how
much will be demanded at higher and
lower prices.
Demand means the full range of
possibilities has been considered.
The Demand Schedule
Economists want to see the market as a whole.
They want to know the amount people will demand
at each and every possible price.
A demand schedule shows the quantity demanded
at all prices that might prevail in the market at a
given time.
The Demand Curve
Demand can also be shown graphically.
The demand curve shows the same information.
The points show the quantity demanded at a particular
price.
The curved line in labeled DD and is always
downward sloping.
The Law of Demand
What generalizations can
you make about demand
based on based on the
figures from the demand
schedule and demand
curve?
The Law of Demand states
that the demand for an
economic product varies
inversely with its price.
High prices mean low
quantity demanded while
low prices mean high
quantity demanded.
II. Change in Quantity
Demanded
Change in Quantity Demanded
We all see the Law of Demand at work when
consumers flock to stores on bargain days and special
sales when prices are temporarily reduced.
A change in quantity demanded is a change in the
quantity of the product purchased in response to a
change in price.
This represented by a movement along the demand
curve.
Change in Quantity
Demanded
An examination of the income and
substitution effects helps explain why this
happens.
The Income Effect-when prices are lower,
consumers have more money, so they buy
more.
At a price of $15 per CD, consumers spent
$555 to buy 37 CDs. If the price drops to $9,
they will spend only $333 on the same
quantity. The consumers are $222 richer
because of the drop in price, and they may
spend more on CDs.
Change in Quantity
Demanded
The Substitution Effect – The change in
quantity demanded because of the
change in the relative price of the
product.
CD’s are cheaper than other relative
products: concerts, movies, and other
forms of entertainment.
III. Change in Demand
Change in Demand
A change in demand occurs when
people are willing to buy different
amounts at the same prices.
This is different than the change in
quantity demanded, which is movement
along the demand curve.
When there is a change in demand, the
entire curve shifts and people buy more
or less at each and every price.
Change in Demand
What kind of things do you think cause a
change in demand?
Change in Demand
Reasons:
1. Consumer Income – As income rises,
consumers are able to buy more at each and
every price. If income declines, consumers
buy less at each and every price.
2. Consumer Tastes – Advertising, news
reports, trends and even seasons can affect
consumer tastes. If consumers want more of
a product, they buy it anyway.
Change in Demand
3. Prices of Related Products - Change in the
price of one can affect the demand for the
other.
A. Substitutes - Products used in place of
other products. Example- butter and
margarine.
B. Complements – Products that the use of
one increases the use of the other. Examplefilm and cameras.
IV. Diminishing Marginal Utility
Diminishing Marginal Utility
People try to get the most useful and
satisfactory combination of goods and
services (aka utility).
Marginal Utility – the extra usefulness
and satisfaction a person gets from
acquiring one or more unit of a product.
Diminishing Marginal Utility
How satisfied would you be after
drinking one glass of lemonade after a
game of tennis or basketball?
The satisfaction you get is the marginal
utility of that particular glass of
lemonade.
How about a second glass?
Marginal utility again.
Diminishing Marginal Utility
Consumers keep buying a product until the unit
consumed gives enough satisfaction to justify the
price.
In the case of the lemonade, the marginal utility of
the first glass probably is far greater than the initial
amount paid for the drink.
In time, the marginal utility of still one more glass
of lemonade will be less than its price. (The
thought of one more glass may make you ill.
When you reach the point that the marginal utility
is less than the price, you will stop buying.
Diminishing Marginal Utility
The lemonade example
illustrates the principle of
diminishing marginal utility.
Diminishing marginal
utility states the more you
acquire, the less eager you
are for more. You become
less willing to spend your
limited income to buy more.
What are some other
situations that illustrate
diminishing marginal utility?
V. Elasticity of Demand
Demand Elasticity
The Law of Demand shows that people buy
more of an economic product at lower prices
than at higher ones.
It does not tell how much more, however.
Likewise, if prices go up, sales will go down.
How much will sales go down, however?
Demand Elasticity is the extent to which
changes in price cause changes in the
quantity demanded.
Demand Elasticity
The demand for most products is
such that consumers do care
about changes in price.
Demand is elastic when a
relatively small change in price
causes a relatively large change
in quantity demanded.
For example, if a T-bone steak
costs $5.59 per pound, only a
certain number of people will buy
it. However, if it is put on sale at
$3.39 per pound, consumers may
rush to buy this kind of steak.
Demand Elasticity
Demand is inelastic when a
given change in price causes a
relatively small change in
quantity demanded.
For example, a higher or lower
price for table salt will not bring
about much in the quantity
demanded, even if the price
were cut in half. People can only
buy so much salt.
Also, the portion of the person’s
budget spent on salt is so small
that even if the price doubled, it
would not make much difference.
Specific vs. General Market
When considering the
elasticity of demand for a
product, it is necessary to
define the market being
studied.
If demand for gasoline at a
particular gas station raised
prices 10% or dropped prices
10%, it would be very elastic.
On the other hand, if all gas
stations raised prices 10%,
people would still buy, making
it inelastic.
Total Receipts Test
Total receipts, or total revenue, are
determined by multiplying the price of a
product by the quantity sold.
To test for elasticity:
Determine total receipts at the original price
and then again at a lower price.
If at the lower price, the total receipts exceeds
the original it is elastic.
If it does not exceed the original it is inelastic.
Total Receipts Test
Determining Demand
Elasticity
We can also estimate
the elasticity of demand
for a product by asking
three questions:
1. Can the Purchase Be
Delayed?
Insulin? Tobacco?
Tomatoes? T-bone?
If the purchase can be
delayed, the demand
for the product tends to
be elastic.
Determining Demand
Elasticity
2. Are Adequate
Substitutes
Available?
If steaks and butter
go up, what can
buyers switch to?
If a product has
many substitutes,
the demand for it
tends to be elastic?
Determining Demand
Elasticity
3. Does the
Purchase Use a
Large Portion of
Income?
Table Salt? Car?
When the products
require a large
portion of income,
the demand tends to
be elastic.
Determining Demand Elasticity