Circular Flow of Economic Activity and What is Demand?

What is Demand? Demand- the desire to own something and the ability to pay for it The Law of Demand states that as prices decrease people are willing to buy more; As price increases people are willing to buy less PDPDPDPD

Demand Schedule and Curve Demand Schedule- a table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices Demand Curve- a graph that shows the amount of a product that would be bought at all possible prices in the market

Demand Schedule and Curve

Demand Curve Graphic representation of the demand schedule. y-axis = price x-axis = quantity demanded Demand Schedule $ $ $ $ $ $

Market Demand Curves Market Demand Curves- Show how people’s buying habits will change at certain prices ONLY Show a specific market only Assume no other factors change (just price)

WHY WOULD THERE BE A SHIFT (change) IN DEMAND? Consumer’s income changes- As income increases, demand increases Consumer Expectations- if shortage is expected, demand increases Population Size- Population increases, demand increases

WHY WOULD THERE BE A SHIFT (change) IN DEMAND? Consumer Taste- If a good becomes popular, demand increases Change in Price of Related Goods- – Compliments- goods bought together (ex. PB&J) Compliment good price increases, the other good’s demand decreases – Substitutes- goods used in place of one another (ex. skis and snowboards) If a substitute price increases, the other good’s demand increases

Elasticity of Demand Elasticity of Demand- How much the quantity demanded will change if the price rises or falls Elastic Demand- demand that is very sensitive to a change in price – goods that one might stop buying or cut back on as price increased (SUVs, Luxury items) – on a graph this demand curve will be FLAT

Elastic Demand

Inelastic Demand Inelastic Demand- demand that is not very sensitive to a change in price – Goods that you would buy at any price; there are few if any substitutes for these goods (milk, gas, prescription drugs) – on a graph this demand curve would be very steep

Inelastic Demand

Utility We buy products for their utility- the pleasure, usefulness, or satisfaction they give Diminishing Marginal Utility- the principle that our additional satisfaction tends to go down as more and more units are consumed

Types of Economies REVIEW! Create a Bubble Map with the following-