Transcript Ch 4 Demand
Demand What is Demand? The Law of Demand Demand: the desire for an item and the ability to pay for it Law of demand: when price of good or service goes up, quantity demand goes down and vice versa The Law of Demand •Price & Demand ▫ Law of demand explains consumer behavior as well as economic concept ▫ Cheryl decides to spend money on DVDs at $15 each, Cheryl demands 3 DVDs at $5 each, she demands 7 DVDs Demand Schedules ▫ Demand schedule—a table lists how much of an item an individual will buy at each price ▫ Market demand schedule—a table lists how much of an item all consumers will buy at each price Demand Curves ▫ Demand curve—a graph that shows amount of an item a consumer will buy at each price ▫ Market demand curve—amount all consumers will buy at each price What is Elasticity of Demand? Elasticity of Demand ▫ Elasticity of demand measures how responsive consumers are to price changes Elastic—quantity demanded changes greatly as price changes Inelastic—quantity demanded changes little as price changes What Determines Elasticity? •Substitute Goods or Services ▫ If no substitute for a product, demand tends to be inelastic ex. gasoline ▫ If there are substitutes for a product, demand tends to be elastic ex. shoes •Necessity or Luxury ▫ Necessity—something needed for life, demand is inelastic ex. prescription medications ▫ Luxury—something desired but not essential, demand for luxuries tends to be elastic ex. BMW vs. Ford What Factors Affect Demand? ▫ Law of diminishing marginal utility: additional benefit of each additional unit declines as each unit is used ▫ Income effect: amount people buy changes as purchasing power of their income changes ▫ Substitution effect: amount people buy changes as they buy substitute products Change in Quantity Demanded change in amount consumers buy because of change in price does not shift the demand curve itself Change in Demand ▫ Change in demand: caused by a change in the marketplace. It prompts people to buy different amounts at every price. Also causes shift in demand curve ▫ When we shift the demand curve, we assume ceteris paribus: everything else is held constant Change in Income Causes Shift in Demand Curve ▫ As incomes of most consumers in a market change, so does total demand ▫ normal goods—demanded more when consumers’ incomes rise ▫ inferior goods—demanded less when consumers’ incomes rise Change in Population/Market Size Causes a Change in Demand ▫ Demand for most goods changes as market size changes rise in population leads to increased demand decrease in population leads to decreased demand Consumer Tastes/Advertising Causes a Change in Demand ▫ Consumer tastes change; products gain and lose popularity ▫ Consumers demand a greater amount of popular items at every price ▫ Sellers advertise to create demand for products Change in Consumer Expectations Cause a Change in Demand ▫ Expectations about future price of items affect individual behavior expected rise or fall in price can decide whether to buy now or wait ▫ Expectations of all consumers in a market affect demand Ex. because cars go on sale at end of summer, demand goes up then Change in Price of Related Goods Causes a Change in Demand •Substitutes ▫ products used in place of each other if price of substitute drops, people buy it instead of original item if price of original item rises, people will buy substitute Complements •goods that are used together -a rise in demand for one increases the demand for the other -If price of one product changes, demand for both changes in same way. -If price of one rises, demand for both will drop