Transcript DEMAND

Chapter 4
Demand
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Objectives
•
• Explain the law of demand
• Understand how the
substitution effect and the
income effect influence
decisions
• Create demand schedule and
interpret data using demand
graph
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Terms you will need to know:
•
• Demand
• Law of demand
• Substitution effect
• Income effect
• Demand schedule
• Market demand schedule
• Demand curve
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DEMAND: The Desire to
own something and the ability
to pay for it
• In a market system, the
interaction of buyers and sellers
determines the prices of most
goods as well of what quantity
of a good will be produced
• Buyers demand goods,
and sellers supply those goods.
Simply states that quantity demanded moves in the opposite direction of price (All
other things constant or ceteris paribus).
• As price rises, quantity demanded decreases
•
P rises Q decreases
• As price falls, quantity demanded increases
•
P falls Q
increases
The Law of Demand is the result of (2) separate
patterns that overlap.
1)
2)
•
Substitution effect: When consumers react to an
increase in a good’s price by consuming less of that
good and more of other goods.
• Example:
If the price of the pizza you eat for lunch increases,
you will seek out alternative foods to such as
burgers, tacos, etc. (Similarly, if the price of pizza
falls, you will buy more pizza and less of other
foods)
Income effect: The change in consumption
resulting from a change in real income
• Example:
As prices increase you feel poorer because you can
no longer afford the same things with the money you
make. The income effect then means that you will
simply cut back on consumption rather than just
finding alternatives (think about water, electricity,
etc.)
These two patterns describe two different ways
consumers can change their spending patterns and
explain why an increase in price decreases the quantity
purchased.
*
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s/the-relation-between-supply-and-demand
What is a Demand Schedule:
• * A table that lists the quantity of a
good a person will buy at each different
price.
• * (Basically, a graph that outlines the
relationship between price and quantity
demanded for a certain good.)
• Types to consider:
• Individual demand schedule: Places
emphasis on the specific quantities an
individual is willing and able to purchase
at a specific price.
• Market demand schedule: Lists the
quantity of a good all consumers in a
market will buy at each different price.
• (Can be formed by surveying customers
and adding up the quantities demanded by
individual consumers at each price)
•
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Individual and Market Demand Curves
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Chapter 4
Demand
Section Two
Shifts on the Demand
Curve
•
• Ceteris paribus
• Normal Good
• Inferior Good
• Complements
• Substitutes
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Ceteris Paribus
• This is a Latin phrase that simply means, “
all other things held constant.”
• When dealing with basic demand and
supply curves the assumption that only price
will affect the increase or decrease of a
quantity
• Decrease in quantity demanded:
• Increase in price of goods
• Increase in quantity demanded:
• Decrease in price of goods
• Remember: Under the idea of
ceteris paribus, the change in
Quantity (Q) is dependent on
the Change in Price (P)
Other factors besides price can also cause the demand
for a good to change.
•
•
Income: Simply, a change in income (either increase or
decrease) can affect a consumer’s demand for goods.
•
Normal Good: A good that consumers demand more when their
income increases
•
Inferior Good: A good that consumers demand less of when their
income increases (generic brands)
Consumer Expectations: Current demand for a good is
positively related to its expected future price
•
If you expect the price of an item to go up in a week your
present demand will increase, if you expect it to go down in a
week your present demand will decrease)
•
Population: Changes (increase/decrease) in population will
affect the demand for certain goods.
•
Consumer Tastes and Advertisement: What is in style (fads
in clothing , food, etc., )
• The demand curve for one good may
•
be affected by the changes in demand
of another good
Two types of related goods that
interact this way:
• Complements: Two goods that are
bought and used together.
• Skis & Ski boots ( an increase in the
price of one will result in the
decrease in demand for the other
because one item is useless without
the other)
• Substitutes: Goods used in place of
one another
• Buying snowboards as a substitute
for skis because the price of skis has
increased.
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Section Three
Elasticity of demand
• Elasticity of Demand
• Inelastic
• Elastic
• Total revenue
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• Are their certain products you could not
do without? List three in your notes
• How would your list change if the prices
of each doubled or even quadrupled?
• Are there some things in your list you
can and cannot do without?
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• Elasticity of demand:
•
A measure of how consumers react to a
change in price.
Two types to consider:
• Inelastic: Demand that is not very
sensitive to a change in price
•
Example:
Something you will keep buying no matter the
change in price
• Elastic: Demand that is sensitive to a
change in price
•
Example:
Something you will buy less of in the event of a
price increase
Retrieved from: http://www.econs.com.sg/free-downloads/elasticity/
• Total Revenue:
The total amount of
money a firm receives by selling goods or
services.
• Determined by two factors:
• 1) The price of the goods;
• 2) the quantity sold.
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