Transcript File

Understanding Demand
Students will be able to identify
characteristics of the law of demand.
Students will be able to define and/ or
identify the following terms:
Law of Demand
Substitution Effect
Income Effect
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ESSENTIAL QUERY
• EQ: What is demand, and how does it
impact economies?
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Look at this demand curve.
What happens to quantity purchased
as prices rise?
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Why do we purchase more when a sale
occurs?
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The Law of Demand
• The law of demand states that consumers
buy more of a good when its price
decreases.
• Conversely, consumers buy less of a good
when its price increases.
• Consumers love low prices.
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It’s obvious, isn’t it? Consumers
love low prices.
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The Substitution Effect
• One reason that the law of demand exists
is the substitution effect.
• The substitution effect occurs when a
consumer reacts to an increase in a
good’s price by buying less of that good
and more of a similar yet cheaper good.
• When the price of orange juice rises,
consumers substitute cheaper apple juice
for orange juice.
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It really depends on the price, doesn’t it?
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The Income Effect
• The income effect is the change in
consumption resulting from a change in
income.
• In other words, when prices rise, your
money buys less.
• Higher prices reduce your purchasing
power.
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Lower prices allow consumers to
increase demand.
Lower prices increase consumers’
purchasing power.
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A demand schedule records the quantity
demanded at various prices.
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A demand schedule can easily be
converted to a demand curve.
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Economists love graphs because graphs
provide easy understanding of economic
concepts.
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If a picture is worth a thousand words,
a graph is worth even more.
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Questions for Reflection:
• State the law of demand.
• Provide an example of the substitution
effect.
• How does the income effect lead to the
law of demand?
• What is a demand schedule?
• What is a demand curve?
• Why do economists love graphs?
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Gas prices keep rising but we keep
buying!
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Doesn’t the law of demand state that
consumers buy less at higher prices?
So, why are we still buying gas?
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Elasticity of Demand
• Elasticity of demand is a measure of how
consumers react to a change in price.
• Inelastic demand is demand that is not
very sensitive to a change in price.
• Elastic demand is demand that is very
sensitive to a change in price.
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Think pants. These pants have
inelastic waistbands. The waistbands
do not change if people gain weight.
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Our demand for gasoline is inelastic.
It does not change even with a price
increase.
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Think pants again! Sweat pants have
elastic waistbands. The pants change
depending on the size of the person.
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Our demand for apple juice
is elastic. If the price increases,
we will buy less. Our demand
changes.
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So, why is our demand for apple juice
elastic and our demand for gasoline
inelastic?
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Factors Affecting Elasticity of
Demand
• The following are factors that can affect
the elasticity of demand:
Availability of Substitutes
Relative Importance
Necessities Versus Luxuries
Time (It takes time to find substitutes.)
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It’s obvious, isn’t it?
We can substitute orange juice
for apple juice.
Therefore, we deal with a price increase
by substituting one product for another
product.
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However, we cannot
substitute milk
for gasoline.
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What is this graph telling us about
elasticity of demand?
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While the price of a good influences a
consumer’s decision to purchase, it is
not the only factor.
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Ceteris Paribus
• Ceteris Paribus is a Latin phrase meaning
that all other things are held constant.
• A demand curve assumes Ceteris Paribus
or that only price is changing while all
other things are held constant.
• In other words, a demand curve only looks
at price. It does not consider other factors
that influence demand.
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As any parent will tell you, sometimes
cereal is only bought for the toy inside.
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Shifts in the Demand Curve
• When a demand curve shifts, it moves.
• Price can never shift a demand curve
because price is in the demand curve.
• To shift a demand curve, it must be some
factor other than price.
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D is the original demand curve
D1 is the demand curve after it
has shifted. Notice that by shifting
to the left, demand has decreased
at every price level.
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Here is a simple rule to remember:
If the curve shifts left, left means
less. Demand has decreased at
every price level.
If the curve shifts right, right means
more. Demand has increased at
every price level.
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Certainly, an outbreak of Mad Cow’s
Disease would decrease demand for
beef at every price level.
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Factors that Can Shift a Demand
Curve
• The following are factors that can shift a
demand curve:
Advertising
Population
Consumer Taste
Consumer Expectations about Future Prices
The Price of Complements
The Price of Substitutes
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The Baby Boom generation increased
demand for goods at all price levels.
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Advertising can increase demand at
all price levels.
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Complements are goods purchased
together. If the price of the Game Cube
rises, people will buy fewer games.
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If we think the price of a popular
good will drop, we will buy less
at all price levels today and wait
for the future lower price.
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