Transcript demand - Granbury ISD

DEMAND
“How Markets work”
What is Demand?
Ferrari F-430 Retail: $ 350,000
Rolex Crown Collection
Retail: $ 64, 500
Chloe
Platinum
2ct
Eternity
Ring
ISA Ancona Yacht
Lamborghini Gallardo
Retail: $310,000
List: $14,500,000
$ 5,629.73
Does WANT = DEMAND?
Three Criteria have to be met:
1. Desire
2. Ability
3. Willingness
Demand = the desire, ability, and
willingness to purchase goods and
services (G/S).
The AMOUNT consumers will BUY @ various
PRICES!
The LAW of DEMAND
• Ceteris paribus, as prices rise, the
QUANTITY DEMANDED falls.
Vice versa
• Ceteris paribus, as prices fall, the
QUANTITY DEMANDED increases.
Three Reasons for the Law of
Demand
We call these the:
Income Effect
Substitution Effect
Diminishing Marginal Utility
INCOME EFFECT
P
I
P
I
• As prices go down, consumers “real’
income goes up! They can buy more
with each dollar.
• As prices go up, consumers “real”
income goes down! They can buy less
with each dollar.
SUBSTITUTION
EFFECT
• As the price for a good
or service increases,
consumers will substitute
another good or service
that is cheaper.
DIMINISHING MARGINAL
UTILITY
• As we buy more and more of a good
our level of satisfaction (utility)
diminishes.
• We will not continue to buy more
unless the seller lowers the price.
• BOGO HALF OFF
Demand Schedule
• A TABLE showing the amount that will be
purchased at various prices.
Price Quantity
$1.00 10
$2.00
5
$3.00
2
Demand Curve
A GRAPH that shows the AMOUNT that will
be purchased at VARIOUS PRICES.
Price of
Ice-Cream
Cone
$3.00
2.50
2.00
1.50
Price
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
12
10
8
6
4
2
0
1.00
0.50
0 1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones
Price Elasticity of Demand
Demand elasticity: A measure of how
much the quantity demanded of a good
responds to a change in the price of that
good.
Demand is elastic if the quantity
consumers buy changes substantially
when the price of the good changes
Demand is inelastic if the quantity
demanded changes proportionately less
than the change in price.
Determinants of
Price Elasticity of Demand
Demand tends to be more
elastic :
 If the good is a luxury.
 The longer the time
period.
 The larger the number of
close substitutes.
 The more narrowly
defined the market
Demand tends to be more
inelastic:
 If the good is a necessity
 The shorter the time
period.
 The smaller the number
of close substitutes.
 The more largely defined
the market.
Elastic Demand
Price
1. A 22% $5
increase
in price... 4
An elastic demand curve is fairly
flat – showing small changes in
prices cause large changes in
quantity demanded
Demand
Quantity
50
100
2. ...leads to a 67% decrease in quantity.
Inelastic Demand
Price
1. A 22% $5
increase
in price... 4
An inelastic demand curve is
fairly steep – showing changes
in prices lead to smaller
changes in quantity demanded
Demand
Quantity
90 100
2. ...leads to a 11% decrease in quantity.
Changes in QUANTITY Demanded…
• A change in QUANTITY DEMANDED means consumers
are BUYING MORE OR LESS because of a CHANGE
IN PRICES.
• A change in QUANTITY DEMANDED is demonstrated
by MOVEMENT ALONG a demand curve caused by a
CHANGE IN PRICE
Price
(P)
A
P
rQD
1
B
P2
D1
0
0
Q1
Q2
Quantity Demanded (QD)
What causes a change in quantity
demanded?
A change in price.
The LAW of DEMAND
• CETERIS PARIBUS, as prices rise, the
quantity demanded falls and vice versa
along a constant demand curve.
CETERIS PARIBUS means “While
one
thing changes (price),
everything else remains the
same.”
Will you never be willing or able to
buy this car?
IS DEMAND…
Changes in DEMAND
• A Change in Demand means:
– Consumers purchase more or less products
at EVERY PRICE LEVEL causing a change
in the demand schedule and a shift of the
curve.
Price
(P)
rD
P2
P1
D1
0
0
D2
Quantity Demanded (QD)
D3
Changes in DEMAND
• Demand changes when something other
than price changes the market conditions.
• Non-price Determinants of Demand
– Income of Consumers
– Number of Buyers (population changes)
– Expectations of Prices or Income in the Future
– Prices of Related Goods (Substitute goods or
Complementary goods)
– Tastes & Preferences of Consumers