Demand: The desire to own something and the ability to pay for it Understanding Demand Demand: The desire to own something and the ability to pay for it

Law of Demand: Consumers will buy more of a good when its price is lower and less when its price is higher

Law of Demand As Price goes down from P1 to P2… …then Quantity demanded goes up from Q1 to Q2

Law of Demand And the opposite is true as well: When the Price goes up from P1 to P3… …the Quantity demanded goes down from Q3 to Q1

Law of Demand Substitution Effect: When consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good

Law of Demand Income Effect: The change in consumption that results when a price increase causes real income to decline – you “feel" poor The opposite is true as well – when prices decrease you feel richer

Demand Schedules A table that lists the quantity of a good a person will buy at different prices

Demand Curves A graphic representation of a demand schedule

Elasticity of Demand for Consumers A measure of how consumers respond to price changes – Or…how strongly you will react to a change in price for a given good Things to keep in mind The original price How much you want the item

Elasticity of Demand Inelastic Demand: The quantity demanded responds only slightly to changes in price Necessities tend to have inelastic demand Dr. office visits Basic Food items ???

Elasticity of Demand for Consumers Inelastic Demand: Keep buying even if price increases a lot !! Demand that is not very sensitive to price changes. Substitutes are not available Seen as a necessity No time to react in the short run Value calculated is less than 1

Examples of Inelastic Demand Concert tickets to your favorite band ever!! Life saving medicines Insulin Gasoline (in the short run) Water (if you’re in the desert) Some foods Milk, orange juice, etc.

Inelastic Demand Calculation $6 –$ 2 X 100 = 67 $ 6 10 – 15 X 100 = 50 10 50% = 0.746 67% Take old price minus new price and divide by old price times 100 Take old quantity minus new quantity and divide by old quantity times 100 Divide percent change in quantity by percent change in price If answer is less than 1 the demand is inelastic

Elasticity of Demand Elastic Demand: Stop buying as much even if price increases just a little – demand is very sensitive to price changes The quantity demanded responds substantially to changes in price Luxuries tend to have elastic demand Gold Ice Cream ???

Elasticity of Demand for Consumers Elastic Demand: Demand that is very sensitive to a change price Substitutes are available May be seen as a luxury Substitutes can be found in the long term Value calculated is greater than 1

Examples of Elastic Demand Some restaurants Small increases in price may Make you eat out less Switch to a cheaper place Gasoline (in the long run) Some foods Steak, lobster Even a small increase in price may cause your family to cut out these foods

Elastic Demand Calculation $4 - $3 X 100 = 25 $4 10 – 20 X 100 = 100 10 100% = 4.0 25% Take old price minus new price and divide by old price times 100 Take old quantity minus new quantity and divide by old quantity times 100 Divide percent change in quantity by percent change in price If answer is greater than 1, than demand is elastic

Elasticity of Demand for Consumers Unitary Elastic Demand: Increases or decreases in price have a corresponding increase or decrease in demand The percentage change in quantity demanded equals the percentage change in price So, the value calculated is exactly equal to 1

Factors that affect Elasticity Availability of Substitutes Few substitutes means you still buy it even if price increases (heart transplant) Relative Importance How much of your budget do you spend on those goods If you spend a lot of your income on clothing even a modest increase in clothing costs will cause a reduction in the quantity you purchase

Factors that affect Elasticity Necessities vs. Luxuries This is a personal decision on what you consider to be a product you will always buy despite price increases Changes that occur over time Do you have time to react to the price change or not?

Who cares??? Businesses Consumers Need to always be aware of how much they can charge consumers and make the most profit How much money are you willing to spend on various products… Can you substitute? Is it a necessity or luxury? How will the purchase effect your overall budget? Where will you shop? How much will you buy? Do you have time to react to changes in pricing?

The End  Blah, blah, blah, blah Etc………

Elasticity of Demand for Consumers Questions: Suppose the price of a certain life-saving medicine rises by 50%. In the month following the price change, sales decrease by 5%. Is the demand elastic or inelastic?

Elasticity of Demand for Consumers Inelastic: 5% divided by 50% equals 0.1 elasticity of demand. After a year, sales of the medicine decrease by 50%. What might have happened?

Elasticity of Demand for Consumers People had time to find new substitutes or other companies started making a similar product