Transcript Unit 3 – Demand

What Is the Law of Demand?
The law of demand states that consumers buy more
of a good when its price decreases and less
when its price increases.
• The law of demand is the result of two
separate behavior patterns that overlap, the
substitution effect and the income effect.
• These two effects describe different ways
that a consumer can change his or her
spending patterns for other goods.
• 3 economic concepts help
explain the law of demand:
1.Income effect- an increase or
decrease in consumer
purchasing power caused by a
change in price.
– Purchasing Power- the amount
of income that people have to
spend on goods and services.
2. Substitution Effectconsumer’s tendency to
substitute a lower price good for
a similar 1 that is priced higher.
3. Diminishing marginal utilitythe usefulness of each unit
consumed decreases with each
additional unit.
The Demand Schedule
• A demand schedule is a • A market demand schedule
table that lists the
is a table that lists the
quantity of a good a
quantity of a good all
person will buy at each
consumers in a market will
different price.
buy at each different price.
Demand Schedules
Individual Demand Schedule
Price of a
slice of pizza
Quantity demanded
per day
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
5
4
3
2
1
0
Market Demand Schedule
Price of a
slice of pizza
$.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity demanded
per day
300
250
200
150
100
50
The Demand Curve
• A demand curve is
a graphical
representation of a
demand schedule.
• When reading a
demand curve,
assume all outside
factors, such as
income, are held
constant.
Price per slice (in dollars)
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
Demand
.50
0
0
50
100 150 200 250 300 350
Slices of pizza per day
Shifts in Demand
• The Law of Demand only works assuming “all
other things are held constant.”
• When this assumption is dropped, movement
no longer occurs along the demand curve.
Rather, the entire demand curve shifts.
Ch. 4 Section 2- Shifts of the Demand Curve
• Determinants of
demand: Factors
other than price
that influence the
amount of
demand for a
good or service.
– Shifts the curve to
the right
(increase) or the
left (decrease).
What Causes a Shift in Demand?
• Several factors can lead to a change in demand:
1. Income
Changes in consumers incomes affect demand. A normal good is a good
that consumers demand more of when their incomes increase. An inferior
good is a good that consumers demand less of when their income
increases.
2. Consumer Expectations
Whether or not we expect a good to increase or decrease in price in the
future greatly affects our demand for that good today.
3. Population
Changes in the size of the population also affects the demand for most
products.
4. Consumer Tastes and Advertising
Advertising plays an important role in many trends and therefore influences
demand.
Prices of Related Goods
The demand curve for one good can be affected by a
change in the demand for another good.
• Complements are
two goods that are
bought and used
together.
• Example: skis and
ski boots
• Substitutes are
goods used in place
of one another.
• Example: skis and
snowboards
Product 1
Product 2
1. Pepsi
Coke
2. Hamburger
Ketchup
3. Hamburger
Bean Burrito
4. Computer
Flash Drive
5. Pencil
Notebook Paper
6. DVDs
Video Tapes
7. Headphones
IPod
Substitute or
Complement
Product 1
Product 2
Substitute or
Complement
1. Pepsi
Coke
Substitute
2. Hamburger
Ketchup
Complement
3. Hamburger
Bean Burrito
Substitute
4. Computer
Flash Drive
Complement
5. Pencil
Notebook Paper
Complement
6. DVDs
Video Tapes
Substitute
7. Headphones
IPod
Complement
Fill in the answers to the following
questions with (increase/decrease) or
(complement/ substitutes.
Exp. The price of Big Macs increases
causing a decrease in the Big Mac
market. Therefore, the demand for Mc
Fries decreases because the two items
are complements.
1. The cost of Honda Accords decreases,
causing ________ in the Honda market.
Therefore, the demand for the Toyota
Camry (assume they have about the
same value) __________ because the
two items are______________.
2. The cost of automobile maintenance
increases, causing__________ in the
maintenance field. Therefore, the
demand for public transportation
_______because it is____________.
1. The cost of Honda Accords decreases,
causing increase in the Honda market.
Therefore, the demand for the Toyota
Camry (assume they have about the
same value) decreases because the two
items are _substitutes__.
2. The cost of automobile maintenance
increases, causing _decrease_ in the
maintenance field. Therefore, the
demand for public transportation
increases_ because it is _a substitute_.
3. The price of movie theater tickets
increases, causing ________ in the movie
ticket market. Therefore, the demand for
movie rentals_________ because the two
items are _____________.
4. The price of CD players decreases,
causing ____________ in the CD player
market. Therefore, the demand for CDs
__________ because they are
______________.
3. The price of movie theater tickets
increases, causing decrease in the movie
ticket market. Therefore, the demand for
movie rentals increases because the two
items are substitutes.
4. The price of CD players decreases,
causing __an increase_ in the CD player
market. Therefore, the demand for CDs
_increases__ because they are
__complements.
Which way would a demand curve shift in the following scenarios?
Write “left” or “right” and which determinant of demand caused the
shift.
1. Papa John’s Pizza is offering $1 pizzas for students
on Monday nights.
2. The government releases a report that Taco Bell’s
meat is actually dog food.
3. Susan’s job at Six Flags ends in late October.
4. John has taken a second job.
5. Abercrombie opened a new store dedicated to preteens.
6. The local Pepsi plant has an explosion and has to
close, what happens to the demand for Coke?
7. The price of jelly increases 200%, what happens to
the demand for peanut butter?
DEMAND HEADLINES
• Read the following eight newspaper headlines. In
each case decide if the event will cause a change
(shift) in the demand for beef in May. If so, determine if
it is an increase (right shift) or a decrease (left shift)
and tell which of the determinants of demand has
caused the shift:
• Prices of related goods
• Income
• Consumer Expectations
• Population
• Consumer Tastes and Advertising
• NOTE: 1 Headline will not lead to a shift in demand instead it
will indicate a change in quantity demanded (due to a change in
price.)
HEADLINE 1: Price of beef to rise in June
• Example:
Demand (for beef in May) increases_ because of
consumer expectations
2. HEADLINE 2: Millions of foreign immigrants
swell the US population
Demand _________ because _____________
3. HEADLINE 3: Pork prices drop
Demand _____ because ______________
4. HEADLINE 4: Surgeon General warns that
eating beef can be hazardous to your health
Demand ________because____________
5. HEADLINE 5: Beef prices fall; consumers
buy more
Demand ______ because _________________
6. HEADLINE 6: Real income for Americans
drops third month in a row
Demand _____because ___________________
7. HEADLINE 7: Charcoal shortage
threatens Memorial Day cookouts
Demand ________ because ____________
8. HEADLINE 8: Nationwide fad: The superburger
Demand ________because __________