Transcript The Law of Demand

The Law of Demand
…and YOUR powers as a
consumer.
Essential Standards
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The student will explain how the Law of
Demand works to determine production
and distribution in a market economy.
The student will define the Law of
Demand.
The student will identify and illustrate on
a graph the factors that cause changes in
market demand.
The student will define price elasticity of
demand.
Demand
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Demand—the desire
to own something and
the ability to pay for
it.
Quantity Demanded—
The amount of a good
or service people will
buy at a given price, in
a given time period.
The Law of Demand
An
INCREASE in the price of a good or service
causes a DECREASE in the quantity demanded,
and a DECREASE in the price of a good or a
service causes an INCREASE in the quantity
demanded…
There
is an
INVERSE RELATIONSHIP
Between Price and
Quantity Demanded
The price of french fries in the
McEachern lunch room decreases from
$1.25 to $.50. What should happen to
the QUANTITY DEMANDED?
A.) The Quantity Demanded should fall.
B.) The Quantity Demanded should rise.
C.) The Quantity Demanded will remain the same.
D.) I am not paying attention and expect Mrs. Roma to
pass me anyway.
Demand vs. Quantity Demanded
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The way you determine whether or
not you are referring to DEMAND or
QUANTITY DEMANDED is asking
yourself if you are responding
specifically to price. If the answer is
YES then it is a change in Quantity
Demanded.
Example:
1. I start car pooling and buy less gas
because prices are $4 a gallon.
This is a change in QUANTITY
DEMANDED.
2. I start car pooling because I believe
burning fossil fuels causes global
warming.
This is a change in DEMAND.
In example #2 my decision had
nothing to do with price.
Demand Schedule for Stereos
Price per Car
Stereo
 $500
 $400
 $300
 $200
 $100
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Quantity
Demanded
 500
 1,000
 1,500
 2,500
 5,000
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Demand Curve
P
R
I
C
E
$500
$400
$300
$200
$100
500
1000 1500 2500 5000
Quantity Demanded
Changes in Demand
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What can cause
demand to change?
Price?
NO. A change in
price just causes a
change in the
Quantity Demanded.
To cause a change in
demand, other
things must happen:
1. Diminishing Marginal Utility
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The marginal utility of each unit
LESSENS with each unit.
For example…
$3 for an ice cream cone (your
first) might seem well worth
the money…
Maybe even a second cone
would seem worth another
three bucks…
But for your third? Maybe
$1.50?
Your fourth? What? 75 cents?
A fifth? Would you even take it
for nothing?
The ADDITIONAL
USEFULLNESS diminishes with
each unit consumed.
Examples of Demand-Changes Causes
2. Consumer Tastes—the demand for
poofy haircuts is very low because
they are UNFASHIONABLE…
…Not because they are
EXPENSIVE.
3. Population Size—when people
begin crowding an area, the
demand for…
…Housing, parking, tables at
restaurants, etc., INCREASES.
4. The income effect—as people
become more wealthy, they buy
more stuff...
…Their demand for luxury cars
might INCREASE, regardless of
high prices.
When Mrs. Roma was born in 1971 bell bottoms
were all the rage. However, if you wore them
today you should expect to be laughed at. This
is an example of a change in
______________________.
A.) Population Size
B.) Consumer Taste
C.) The Income Effect
D.) I am still not paying attention and will place
my graduation in the hands of the benevolent
Mrs. Roma.
More Examples of Demand Change
5. The Complementary
Effect—if the price of milk
goes up…
…The QUANTITY of milk
DEMANDED will
decrease…
…And the DEMAND for
cereal will also decrease.
6.The Substitute Effect—if the
price of hotdogs rises…
…The QUANTITY of
hotdogs DEMANDED will
decrease…
…And the DEMAND for
hamburgers will increase.
The price of peanut butter
increases. As a result, the demand
for Jelly goes down. This is an
example of the the
______________effect.
A.) Substitute
B.) Complementary
C.) Trade Off
D.) Maybe I should actually start paying attention.
Mrs. Roma might not be that benevolent.
Demand Change: Consumer Expectations
7. If consumers expect
that prices will
FALL in future…
…current demand will
…DECREASE.
8. If consumers expect
that prices will RISE
in the future…
…current demand
will…
…INCREASE.
Elasticity of Demand
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Elastic demand occurs
when a small change in the
price of a good causes a
major, opposite change in
the quantity demanded…
For example…
If movie tickets went up by
three dollars (a small
change)…
It could possibly cause an
enormous change in the
quantity of movie tickets
demanded.
Elastic demand usually
applies to WANTS, rather
than NEEDS.
Inelastic Demand
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Inelastic demand exists
when the price of a
good has little impact
on the quantity
demanded…
The demand for bread,
milk…what
else?...tends to be
inelastic.
And inelastic demand
usually applies to
NEEDS, rather than…?
Which of the following is the most
elastic product?
A.) Water
B.) Bread
C.) Bubble Gum
D.) I need to start paying attention or Mrs. Roma
will fail me.
Factors Affecting Elasticity
1.
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Availability of
Substitutes—
Demand for movie
tickets is ELASTIC…
Demand for
prescription
medicine is
INELASTIC.
Factors
Affecting
Elasticity
2. Necessities vs. Luxuries—Demand for necessities
(diapers) is…
…INELASTIC…
…Demand for luxuries (earrings) is…
ELASTIC.
3. Change Over Time—it often takes time for
demand to become elastic…
…When gas prices shot up in 1970’s, small cars
didn’t become widespread until the 1980’s.