Demand

Demand Shows amount of product that consumers and willing and able to purchase Demand Curve (Price by Quantity) Law of Demand Diminishing marginal Utility Determinants of Demand

Changes in Demand Preferences # of Buyers Incomes Price of related good Substitute good Complementary good Consumer Expectation Changes in Quantity demanded

Price Elasticity of Demand Measures buyers’ responsiveness to price changes Elastic demand Sensitive to price changes Large change in quantity Inelastic demand Insensitive to price changes Small change in quantity The law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not tell us how much more. The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand. If demand is elastic, there is a large change in quantity demanded even when price changes by a small amount. When demand is inelastic, there is a very small change in quantity demanded even when there is a large change in price. LO1

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Price Elasticity of Demand Formula Formula for price elasticity of demand Ed = percentage change in quantity demanded of product X percentage change in price of product X Quantitative measure of elasticity, Ed = percentage change in quantity/ percentage change in price. LO1

Determinants of Price Elasticity of Demand Substitutability More substitutes, demand is more elastic Proportion of income Higher proportion of income, demand is more elastic With more substitutes available, consumers have more alternative options, so when there is a change in price, there is a greater percentage change in quantity demanded, making the demand more elastic. The broader the definition of the market, the more elastic the demand. With a more narrow definition of the market, demand is more inelastic. The greater the proportion of income needed to buy the good the more elastic the demand. Consumers will be more sensitive to changes in prices because the price change can result in thousands of dollars difference. LO3

Determinants of Price Elasticity of Demand Luxuries versus necessities Luxury goods, demand is more elastic Time More time available, demand is more elastic Since luxuries are goods that consumers can go without, they will change the amount they purchase by a greater amount even if the price changes by a small amount. It takes time to alter the amount being purchased, so the more time available, the more elastic the demand. A person doing their Christmas shopping on Christmas Eve has a very inelastic demand because he/she doesn’t have the time to look around for alternative purchases. LO3

Types of good Normal Good- demand increases as income increases Inferior Good- demand decreases as income increases