Section 1: Understanding Demand Chapter 4: Demand Section 1: Understanding Demand

$ D D $ Understanding Demand Definition The Law of Demand The DESIRE to own something and The ABILITY to pay for it The Law of Demand As prices for an item rise, the demand for that item drops As prices for an item drop, the demand for that item rises $ D D $

Effects on demand The Substitution Effect Finding a different product to substitute for your favorite product As the price of your favorite good rises, the purchasing of that good (demand) falls As the price of your favorite good rises, the amount of purchases (demand) of a decent alternative also rises If the price of your favorite good drops, you go back to buying more of your favorite and less of the alternate

Effects on demand The Income Effect If your income drops and prices remain the same, demand will drop If your income rises and demand will rise

Effects on demand The Income Effect If your income stays the same while prices rise, demand will fall . same while prices fall, demand will rise INFLATION

Effects on demand Remember: Economists measure consumption by the AMOUNT of goods BOUGHT/CONSUMED; NOT by the amount of MONEY SPENT on goods

The demand schedule It looks like a It lists Chart Table Specific AMOUNT of goods which will be purchased at VARIOUS prices

The demand schedule Individual demand schedule Market demand schedule The quantity of a good that a single person will purchase at various prices Market demand schedule that the population (market) will purchase at various prices.

The demand curve It looks like a graph The information comes from a demand schedule

The demand curve The axes Vertical Horizontal Prices Lowest at the bottom Highest at the top Horizontal Quantities of goods demanded Lowest at left Highest at right

The demand curve The slope Always DROPS from left to right Visually shows the Law of Demand

Limitations of the demand curve It assumes that all other factors are not changing It is only accurate for One specific good At one specific time It cannot predict the future