Understanding Demand

What is Demand? Market: any place where people come together to buy and sell goods or services An economic market has two sides: The buying side is referred to as demand The selling side is referred to as supply

What is Demand? Demand: the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period Willingness refers to the buyers want or desire to buy the good Ability refers to the buyer having the money to purchase the good

What is Demand? Ex: John doesn’t have $450 for a new Iphone. If he did have the money, he would buy it. John has the willingness to buy the phone, but does not have the ability. Ex: on your own, write an example of a person that has the ability to buy, but not the willingness

Law of Demand Law of Demand: a law stating that as the price of a good increases, the quantity demanded of the good decreases, and that as the price of a good decreases, the quantity demanded of the good increases. If P then Qd ↓ If P then Qd ↑

Law of Demand Example: If the price of a ringtone decreases, the quantity demanded will ___________. If the price for a ringtone increases, the quantity demanded will ___________.

Law of Demand Quantity Demanded: the number of units of a good purchased at a specific price. Ex: Angie buys two scoops of ice cream for $3 at lunch. The two scoops of ice cream is the quantity demanded at $3.

Demand Schedule Price Quantity Demanded 5 10 4 17 3 36 2 38 1 53 The numerical representation of the law of demand

Demand Curve The graphical representation of the law of demand

The Law of Diminishing Marginal Utility A law stating that as a person consumes additional units of a good, eventually the utility gained from each additional utility of the good decreases. This is why demand is a curve more than a straight line

The Law of Diminishing Marginal Utility Ex: You enjoy your first Chipotle burrito more than your second, and you enjoy the second more than the third. What are some other examples?

Work Time  Pick a partner and complete questions 1,2,4,5,6,7 from page 94 in your textbook.

Demand Curve Shift As demand increases, the curve shifts right As demand decreases, the curve shifts left

What Causes the Demand Curve to Shift? Income Preferences Prices of Related Goods Number of Buyers Future Price The next 10 slides will expand on these 5 very important causes/determinants. Take notes with examples of each

What Causes the Demand Curve to Shift? Income: as income goes up or down, people may buy more of less of a product. Income going up or down, does not mean demand will change. It depends on the kind of good. Ex: Food vs. a New Car; House vs. a Vacation

What Causes the Demand Curve to Shift? Type of good Normal good: a good for which the demand rises as income rises and demand falls as income falls Inferior good: a good for which the demand falls as income rises and rises as income falls Neutral good: A good for which the demand remains unchanged as income rises or falls

What Causes the Demand Curve to Shift? Preferences/tastes: What people like or don’t like a change in favor of a good (people like it) moves the curve to the right a change NOT in favor of the good moves the curve to the left

What Causes the Demand Curve to Shift? Prices of Related Goods: Substitute: a similar good. The price of one good and the demand for the other move in the same direction Complement: a good that is consumed jointly with another good. The price of one and the demand for the other move in opposite directions.

Complements and Substitutes

What Causes the Demand Curve to Shift? Number of Buyers: An increase in the number of buyers in a market area results in higher demand A decrease results in lower demand

What Causes the Demand Curve to Shift? Future Price/Buyer expectations: If buyers think the price of a good will increase or decrease in the future, those expectations will impact demand

Will these cost more or less in the future?

What Causes a change in Quantity Demanded? Price! Ex: only thing that can cause customers to change their quantity demanded of orange juice is a change in price of orange juice. Look on page 99 at the graphic representation. Demand moves demand line Quantity demanded keeps same line and just moves within that line.

Finish Worksheet! Determinants of Demand worksheet due Thursday. Use your time efficiently so you don’t have any homework.

Elasticity of Demand The relationship between the percentage change in quantity demand and the percentage change in price.

Elasticity of Demand Elastic Demand: The type of demand that exists when the percentage change in quantity demanded is greater than the percentage change in price. Ex: If price rises by 10%, quantity demanded falls by, say, 15%. The Slope of the curve is negative 1.5

Elasticity of Demand Inelastic Demand: The type of demand that exists when the percentage of change in quantity demanded is less than the percentage of change in price. Ex: if price rises by 10%, quantity demanded falls, say, 5%. The Slope of the curve is negative .5

Elasticity of Demand Unit-Elastic Demand: The type of demand that exists when the percentage change in quantity demanded is the same as the percentage change in price. Ex. If price rises by 10%, quantity demanded falls by 10% The Slope of the curve is negative 1

What Determines Elasticity of Demand? Number of Substitutes: Luxuries vs. Necessities:

What Determines Elasticity of Demand? Percentage of Income Spent of the Good: Time:

What Determines Elasticity of Demand? Percentage of Income Spent of the Good: Time: Number of Substitutes: Luxuries vs. Necessities: