Transcript DEMAND
DEMAND CHAPTER 4 Goals & Objectives 1. Describe and illustrate the concept of demand. 2. Describe how demand and utility are related. 3. What causes a change in demand. 4. Describe factors that cause demand to change. 5. Describe elasticity of demand. 3 Characteristics of DEMAND 1. Desire to purchase 2. Ability to purchase 3. Willingness to pay To consume goods or services All 3 must be present for the marketplace to illustrate overall demand. Economic Demand Microeconomics • Deals with economic behavior and decision making with SMALL elements of society. --Individuals & Firms (business) Macroeconomics: Study of gov’t economic policy and decision making. The Law of Demand PRICE increases Demand decreases PRICE decreases Demand increases The Law of Demand applies to individuals and business firms only. The Law of Demand is not an absolute. Demand Curve & Price Demand Utility Marginal Utility: the usefulness someone receives from buying one extra product Diminishing Marginal Utility: the usefulness of extra diminishes “Buy one get one free”: Bananas vs. Shoes Marginal & Diminishing Utility Factors Affecting Demand 1. Income Effect: Increased PRICE lessens demand. 1. How do higher prices (inflation) and taxes effect Demand? Government’s Role Changing Income & Demand: Entitlements, Subsidies, Progressive Taxes Taxes & Income Effect Factors Affecting Demand 2. Substitution Effect: Change in quantity demanded effected by increase or decrease in price 1. Competition amongst suppliers/producers lowers prices which increases demand. 2. Governments Role: Regulations of new business start-ups, tariffs, subsidies, bailouts. Change in Demand • 1. Consumer Income: • Tax Increases = less consumption = Increased Entitlements and Subsidies (Socialism). • Tax Decreases = Increased consumption = Fewer Entitlements and Subsidies = lower taxes (Capitalism). Personal Income & GDP Change in Demand • 2. Consumer Tastes: – Fads, Fashions, Trends, Natural Disasters, new products – Shoes, Vehicles, Hurricanes, Newest I-phone. Trends, Demand & Prices Change in Demand • 3. Substitutes: Competition among producers or sellers lowers prices which increases demand. Diversity among products & services creates competition which lowers prices and increases demand. • 4. Complements: Computers and software, cameras and film Change in Demand • 5. Change in Expectations: • Futures Market: I-Phone 6 or 7 • New Job & Income or No job & no income • 6. Number of Consumers: More consumers equals higher demand which equals higher prices. Demand Elasticity How price and quantity of a product or service relates. Full Service Fuel Stations & Minimum Wage Increases The extent at which a change in price can change the quantity demanded Example: $8 Gasoline vs. $8 Milk What happens to demand? Elasticity of Demand Elastic Demand A small change in price causes a relative large change in quantity demanded Milk….$8.00 a gallon causes less demand for milk. Government Subsidies to dairy farmers have caused fewer suppliers of dairy which causes higher milk prices. China Factor? How has free trade with India, China, Mexico, Vietnam affected interdependency on foreign governments, products, and services? How has free trade with India and China affected the prices of goods and wages sold in America? Inelastic Demand A change in price causes little change in demand. Gasoline: A need within society. If gas were to inflate to $8.00 a gallon, quantity demanded would change very little. Substitution Effect would increase? Explain. Gov’t regulation of oil supply reduces competition which increases prices. Inelastic Demand & Price Elasticity and Profits Elasticity is important to business!!!! – Fringe Benefits or higher wages or lower profits, increased production, cut variable or fixed costs? How has the Affordable Care Act affected the elasticity of profits? JIT & JIC Theory’s of production Marketing Techniques relative to Fads and Fashions: Gap Jeans, Nike Tennis Shoes, Wild Turkey, I-Phones: examples.