DEMAND “How Markets work”

To want or not to want? That is the question! What is Demand? Ferrari F-430 Retail: $ 350,000 Lamborghini Gallardo Retail: $310,000 Rolex Crown Collection Retail: $ 64, 500 Chloe Platinum 2ct Eternity Ring $ 5, ISA Ancona Yacht List: $14,500,000

Does WANT = DEMAND? Three Criteria have to be met: 1.Desire 2.Ability 3.Willingness Demand = the desire, ability, and willingness to purchase goods and services (G/S). The AMOUNT consumers will various PRICES!

As prices rise, the QUANTITY DEMANDED falls. Vice versa As prices fall, the QUANTITY DEMANDED increases. The LAW of DEMAND

Two Reasons We call these the: Income Effect and the Substitution Effect

INCOME EFFECT As prices go down, consumers “real’ income goes up! They can buy more with each dollar. As prices go up, consumers “real” income goes down! They can buy less with each dollar. P P I I

Substitution Effect As the price for a good or service increases, consumers will substitute another good or service that is cheaper.

Demand Schedule A TABLE showing the amount that will be purchased at various prices. PriceQuantity $ $ $3.00 2

DEMAND CURVE A GRAPH that shows the amount that will be purchased at VARIOUS PRICES.

Changes in QUANTITY Demanded… A change in QUANTITY DEMANDED is demonstrated by MOVEMENT ALONG a demand curve caused by a CHANGE IN PRICE D1D1 Price (P) Quantity Demanded (QD) A B Q1Q1 Q2Q2 P1P1 P2P2  QD 0 0

What causes a change in quantity demanded? A change in price.

The LAW of DEMAND As prices rise, the QUANTITY DEMANDED falls and vice versa along a constant demand curve, CETERIS PARIBUS.

Ceteris Paribus It means: “While one thing changes (price ), everything else remains the same.”

IS DEMAND…

Changes in DEMAND A Change in Demand means: –Consumers purchase more or less products at EVERY PRICE LEVEL causing a change in the demand schedule and a shift of the curve. D1D1 Price (P) Quantity Demanded (QD) D2D2 D3D3 0 0 DD P 1 P 2

Changes in DEMAND Demand changes when something other than price changes the market conditions. Non-price Determinants of Demand –Income of Consumers –Number of Buyers (population changes) –Expectations of Prices or Income in the Future –Prices of Related Goods –Tastes & Preferences of Consumers