Transcript Law of Demand

Chapter 6:
Demand, Supply & Markets
What is a Market?
• Any network that brings buyers and sellers
together so they can exchange goods and
services
• Doesn’t have to be a physical place, but
can be done over the internet, phone or
fax
• Exists wherever supply and demand
determine the price and quantity of goods
and services sold
Demand
• Is the quantities of a good or service that
buyers are willing and able to purchase at
various prices
• Demand schedule shows the various
prices and quantity demanded at each
price
• Economists consistently will gather data
and put it into a schedule and then to
make it visually easier to understand put
the schedule into graph form
Demand
• Law of Demand: An increase in price will
cause a decrease in quantity demanded
The Demand
Curve
P$
D
0
Q
Quantity Demanded
Law of Diminishing Marginal Utility
• Each additional unit of a good or service
that is consumed brings less satisfaction
or “utils” than the previous unit consumed
• This helps explain why the demand curve
is downward sloping
Elasticity of Demand
• Shows the responsiveness of the quantity
demanded to a change in price
• P x Qd = TR (total revenue)
• Elastic Demand - % P < Qd
• Inelastic Demand – % P >
Qd
• Unitary Demand - % P =
Qd
• Let`s look at page 117 for an example
FACTORS EFFECTING
ELASTICITY OF DEMAND
– # of substitutes (e.g.
margarine and butter)
– small items in a
budget (e.g. pepper,
salt)
– essential items (e.g.
water, electricity,
natural gas)
– time (e.g. gasoline)
Applications of Elasticity of
Demand
• the more inelastic an item the more
heavily it can successfully be used to raise
tax revenue (e.g. cigarettes, gas &
alcohol)
Effect of an Increase in Demand
P$
D
D1
0
Q
Quantity
An Increase In the Demand for Melons
P$
D
D1
$2.50
$2.00
$1.50
$1.00
$0.50
0
5
Q
Quantity Demanded (000’s)
10
15
20 25
Effect of a Decrease in
Demand
P$
D
D0
0
Q
Quantity Demanded
A decrease In the Demand for Melons
P$
D
D0
$2.50
$2.00
$1.50
$1.00
$0.50
0
5
Q
Quantity Supplied (000’s)
10
15
20 25
Your Turn
• Complete page 119 #1,2,4,5