Demand

Wednesday, October 12, 2016 Objective: We will examine demand for goods and services and the concepts of the income and substitution effects. Task: I will be able to explain how demand helps societies determine what, how, and for whom to produce.

What is demand? Demand: the desire to own and the ability to buy a product or service “Anyone who has ever shopped knows the difference between wanting something and being able to pay for it”

Law of Demand When a good’s price is lower, consumers will buy more of it. When price is higher, consumers will buy less of it. This is a result of two patterns of behavior: Substitution Effect Income Effect

Substitution Effect When consumers react to an increase in a good’s price by consuming less of that good and more of other goods. Example: Pizza, Substitutes: Tacos, Salads, Burgers, etc. If the substitutes are available, it will cause a drop in the amount of pizza demanded. Substitution Effect can also apply to a drop in prices. If pizza prices drop, more pizza will be bought than other substitutes

Based on the substitution effect, give an example of how people might respond to a rise in gas prices.

Income Effect The change in consumption resulting from a change in the incomes of consumers. Example: When prices of movie tickets, shoes, pizza increase… our limited budget won’t buy as much as it used to. As a result, you feel like you have less money than before.

Income Effect Difference between Substitution and Income Effect is in the Income Effect, you cut back on your purchases without substituting another product.

Demand Schedule A table that lists the quantity of a good a person will buy at each different price. It explains how the price of any item affects the quantity demanded of that item.

Demand Graphs X-axis: quantity demanded Y-axis: price the graph shows only the relationship between the price of this good and the quantity that will be purchased the demand curve on the graph slopes downward to the right Demand Curve is always labeled with a D

Synthesize Think about the economic concept of demand and the factors that can influence it. Using what you have learned, write a short statement that uses the following terms and explains how they are related: demand price substitution effect income effect