Transcript Demand
Demand Chapter 3 What is demand? • The willingness and ability to purchase a good or service • Demand = Willingness and ability to purchase The Law of Demand • As a price of a good increases the quantity demanded of the good decreases and vice versa – Quantity Demanded – is there a difference between demand and quantity demanded? » A demand for popcorn » Buying the popcorn 2 bags for 1 dollar is quantity demanded Opposite Directions • Why do price and quantity demanded move in opposite directions? – Law of diminishing marginal utility • Candy experiment – As you obtain less utility from additional units you will only buy large quantities at low prices Demand Schedule • Law of Demand says… – The up / down relationship is inverse relationship – A chart showing the inverse is a demand schedule Demand Curve • 3-1 b shows the demand curve – Plotting connected points to show patterns – There are almost always patterns in economics What happens when said curve shifts? • Demand curves shifting right or left show more or less demand of a product at price • What causes these shifts? Income • As income goes up, people have the ability to purchase more of a good – This doesn’t necessarily mean they will • Normal Good – income goes up, purchase of that good goes up • Inferior Good – income goes up, purchase of that good goes down • Neutral Good – income goes up, purchase of that good stays the same Preferences • People prefer certain products – Types of video games Prices of Related Goods • Substitute Goods – Cars – Coffee / Tea – Video Games • Complements – Things that go together • Balls / Bats • PS2 / Games • Cars / Tires Number of Buyers • Certain goods are demanded more in certain areas – Surfboards / CA v. SD Change in Demand v. Change in Quantity Demanded • A change in demand refers to a shift in the curve • Change in quantity demanded = A movement from one point to another point on the same demand curve Responsibilities of Buyers • Researching • Ethics in paying Section 3 • Elasticity of Demand – Relationship between percentage change in in quantity demanded and the percentage change in price % Change in quantity demanded Elasticity of demand = ---------------------------------------------------% Change in price Demand • Elastic demand – when quantity demanded percentage changes more than the price • Inelastic demand – when quantity demanded percentage changes less than the price • Unit Elastic demand – when quantity demanded and price have similar relationships Determinants of Elasticity • The number of substitutes has great effects on elasticity – Heart Medicines – Breads Luxuries v. Necessities • Luxury – don’t need it to survive • Necessity – Food, medicine… – Which goods are elastic? Percentages of Income • Making budgets on any level, percent of income is studied • Obvious which goods are more responsive to • Relationship to Time – Changing to adapt and adjust over time What does it matter? • All versions of elasticity matter, because they relate to total revenue Case 1 • A rise in price does not necessarily mean a rise in revenue Elastic demand + Price rise = TR Decrease Case 2 • If demand is elastic and price is decreased, revenue will go up – Elastic Demand + Price Decline = TR Increase Case 3 • Inelastic demand + Price Rise = TR Increase • If demand is inelastic a price rise will lead to a revenue increase Case 4 • If demand is inelastic and price declines, total revenue will decrease • Inelastic demand + Price decline = TR Decrease Unit Elastic • Equal forces in opposite directions • No change to total revenue