Transcript Determinants of Demand

DEMAND
Law of Demand
 An increase in a goods price causes a
decrease in the quantity demanded and a
decrease in a goods price causes an
increase in the quantity demanded
3 Concepts that explain the Law
of Demand
 Income Effect
 Substitution Effect
 Diminishing Marginal Utility
Demand Schedule
A demand schedule simply shows the quantity
demanded at several different prices.
Demand curve
A demand curve is just a graphic illustration of a
demand schedule showing the relationship between
price and quantity demanded.
Change in quantity demanded
vs. change in demand
Change in quantity demanded
Change in demand
Determinants of Demand
 Factors that cause the entire demand curve
to shift to the right or left, instead of merely
causing movement along the curve.
5 Determinants
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Consumer taste and Preference
Market Size
Income
Prices of Related Goods
Consumer Expectations
Consumer Taste and Preference
 Zubaz
 Cool in the early 90’s
 Not cool anymore
Tastes and preferences
 This slide illustrates how increased popularity of a
good causes the Demand Curve to shift to the
right. The demand increases at every possible
price. People are willing to pay more because it is
in style.
Market Size
 The larger the market
the more demand.
 Before the ad
campaign few people
knew of the product
but after running a tv
commercial in a large
city more people are
aware of the product
which causes an
increase in demand.
Demand and Market Size
 An increase in the number of buyers results in an
increase in demand. A national ad campaign
increases awareness of a product. A decrease in
buyers (in red) would result in the curve shifting
left.
Income Effect
 As income increases it
generally causes an
increase in demand.
Income and demand: normal goods
 A good is a normal good if an increase in income
results in an increase in the demand for the good.
Income and demand: inferior goods
 A good is an inferior good if an increase in income
results in a reduction in the demand for the good.
This demand curve is for Spam, when the minimum
wage rises more people buy steak instead of Spam
resulting in a decreased demand for Spam.
Price of Related Goods
 Substitute Goods
 Products that can be
used to replace the
purchase of similar
goods when prices
rise.
Substitute Goods
Change in the price of a
substitute good
 Price of coffee rises: The rise in coffee prices causes some
people to switch to Tea as a substitute, as a result the
Demand Curve for Tea shifts to the right.
Complementary Goods
Complementary goods are goods that are used together such
as hot dogs and hot dog buns or paint and paint brushes.
When the price of one changes it changes not only the
quantity demand for that item but also for its complement.
Price of hot dogs rises which causes not only the quantity
demanded for hot dogs to decrease but also the demand for
hot dog buns to shift to the left.
Change in the price of a
complementary good
 Price of DVDs rises: because the price of DVD’s
has risen fewer people are buying DVD players.
Consumer Expectations
Expectations
 A higher expected future price will increase current
demand.
 A lower expected future price will decrease current
demand.
 A higher expected future income will increase the
demand for all normal goods.
 A lower expected future income will reduce the
demand for all normal goods.
Elasticity of Demand
 The degree to which changes in a good’s
price effects the quantity demanded by
consumers.
Demand Elasticity
Elastic Demand
 Elastic Demand exists when a small change
in a good’s price causes a major, opposite
change in the quantity demanded.
 The product is not a necessity.
 There are readily available substitutes.
 The products cost represents a large portion
of consumers’ income.
Elastic Demand Curve
 When a good is a elastic in demand its curve tends to be
horizontal indicating that a small change in price drastically
decreases the quantity demanded.
Not a Necessity
Because pizza is not a necessity (for most people)
when the price of pizza rises the demand for pizza
decreases dramatically.
Readily Available Substitutes
If another fast food restaurant has lower prices and I
consider the food equally as good I will go to the
cheaper substitute.
Large portion of Income
Yachts are expensive so if they go up even a few
percent that could be thousands of dollars which
will effect the willingness to buy .
Inelastic Demand
 Inelastic demand exists when a change in a
good’s price has little impact on the quantity
demanded.
 The product is a necessity.
 There are few or no readily available
substitutes.
 The products cost represents a small portion
of consumers’ income.
Inelastic Demand Curve
 When a good is Inelastic in demand its curve
tends to be more vertical indicating that the
quantity demanded changes little even
though price rises or falls significantly.
Necessity
Goods that are necessary tend to have inelastic
demand. People who need medicine to stay alive
will demand medicine at just about any price so
even when the price rises the quantity demanded
changes very little.
Few or No Substitutes
Items with few or no substitutes have inelastic
demand. Milk is an example because there are no
good substitutes for milk so even when the price
rises the quantity demanded changes very little.
Small Portion of Income
Items that are relatively inexpensive have inelastic
demand because even when price rises it does not
greatly effect income so quantity demand changes
very little.
Demand Elasticity
 Addictive Drugs
 Paper Clips