Transcript Demand - Cloudfront.net

Chapter 3
Demand
Section 1-Understanding
Demand
 Demand – willingness to purchase a
specific item at a given price. Demand
can be an ethical issue (i.e., sale of
kidneys)
 Law of Demand – as the price of an
item rises, the quantity demanded
drops, and vice versa.
How to read a demand curve
A demand curve is a graphic representation of a demand
schedule (a table that lists the quantity of a good that a
person will purchase at each price in a market)
1. The graphs shows only the relationship between the price (Y-axis) of a
good and the quantity (x-axis) someone is willing to purchase.
2. There is an inverse relationship between price and quantity demanded.
If P is up, QD is down; if P is down,QD is up.
All demand curves are downward sloping to the right (remember the 2
“D’s” go together).
Demand (continued)
Diminishing Marginal Utility?
A law of economics stating that
as a person increases consumption
of a product - while keeping
consumption of other products
constant - there is a decline in
the marginal utility (satisfaction)
that person derives from
consuming each additional unit of
that product. It explains why
there is a negative slope of the
demand curve.
The Law of Demand is the result of two (2)
separate behavior patterns and explains why
consumers change their spending patterns
1) The Substitution Effect – consumers react to an
increase in a good’s price by consuming less of it and
more of substitutes that are less expensive
Example: Jiffy peanut butter price
Consumption of substitute increases
↑
↑
2) The Income Effect – consumers consume more or less
based on their real income (real income is adjusted for
inflation which reflects real purchasing power)
Example: Jiffy peanut butter price
Consumption of Jiffy and other goods
↑
↓
Section 2–Change in Quantity Demanded
A
B
 Caused by a change in
price
 Results in movement along
the existing demand
curve
Changed the price from $1.00 to $1.50
Change the quantity demanded from 4 to 2
items
Moved from point B to point A
Section 2–Shifts of the Demand Curve
A demand curve is accurate only as long as
there are no changes other than price that
could affect the consumer’s decision (ceteris
paribus)
P
D2
D1
Q
D3
 A shift of the demand curve
is caused by a change in
something other than the
price (determinants)
 Results in movement of the
entire curve
 Rightward shift
represents an increase
(D1 to D2)
 Leftward shift
represents a decrease
(D1 to D3)
T-R-I-B-E-(tastes and preferences,
related goods, income, # of buyers,
expectations)
 Increase in Demand
 Decrease in Demand
 Increase in income (I)
 Increase in the number of
buyers (B)
 Decrease in availability of
substitutes/Increase in the
price of substitutes/decrease
in price of complements (R)
 A new fad (T)
(taste/preference)
 Decrease in income
 Decrease in the number of
buyers
 Increase in the availability of
substitutes/decrease in price
of substitutes/increase in
price of complements
 Something is no longer in
style
 Consumer expectations
(expect prices to fall)
 Consumer expectations(E)
(expect prices to rise)
Related goods
Substitutes-goods used in place of one
another.
Example:
Jiffy peanut butter price
Consumption of substitute increases
↑
↑
Complements-two goods bought and
used together
Complement
Example:
Ski boots price
Purchase of skis
↑
↓
Normal vs. Inferior Goods
Normal good – a good
that consumers demand
MORE of when their
incomes increase (e.g.,
steak)
Inferior good – a
good that consumers
demand LESS of
when their incomes
increase (e.g.
macaroni and
cheese)
Section 3 – Elasticity of Demand
 Elasticity of Demand (Responsiveness to a Price
Change)– if I change the price of an item, what
kind of an effect will it have on the quantity
demanded
Elastic
P
Flat
Notice how flat this
ELASTIC curve
D is. The
price will have a lot of
Q on the demand
effect
Elastic
P
Steep
Notice how steep this
INELASTIC curve is. The
price will not have a lot
of effectQon the demand
Factors Affecting Elasticity
 Elastic
 Responsive to a Price
Change
 Has substitutes
 Luxuries
 Large % of budget
 Can postpone
purchase
 Not in style
 Inelastic
 Unresponsive to a
Price Change
 No good substitutes
 Necessities
 Small % of budget
 Cannot postpone
purchase
 Fads