Demand = the desire to own something and the ability to pay for it Drill 9/12/07 What is DEMAND? Demand = the desire to own something and the ability to pay for it

The Law of Demand When the price is lower, the consumer will buy more of it. When the price is higher the consumer will buy less of it. Substitution Effect – As the price rises, consumers are more likely to buy an alternative product and that causes a drop in demand Buying Power – If the price rises the consumer will feel poorer and will not purchase as much of the product and that will cause a drop in demand

The Law of Demand Diminishing Personal Value – If the price is high people place a high value on the product but as the price falls consumers do not value the product as much and thus may buy more of it Diminishing Marginal Utility – the point reached when the next item consumed is less satisfying than the one before

Demand Schedule A table that lists the quantity of a good that a person will purchase at each price in a market Market demand schedule – Shows the quantities demanded by all consumers in the market

Demand Schedule Price Quantity Demanded $100 2 $80 6 $60 10 $40 14 $20 18

Demand Curve Graphic representation of a demand schedule Price is listed on the vertical axis and quantity demanded is listed on the horizontal axis Demand curves always slope downward and to the right (inverse relationship) Demand curves are limited – only accurate for a specific set of conditions

Demand Curve PRICE $100 • $80 • $60 • $40 • $20 • D1 QUANTITY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ceteris Paribus Ceteris paribus means all other things being equal When looking at a demand curve you can only isolate one thing.

Changes in Demand PRICE Movement along the demand curve is called an increase or decrease in the quantity demanded. $100 • $80 • $60 • $40 • $20 • D1 QUANTITY 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Causes for the Shift in Demand 1. Income Normal goods – goods that consumers demand more of when their income increases For an increase in demand the demand curve shifts to the right For a decrease in demand the demand curve shifts to the left Inferior goods – goods that consumers demand less of when their income increases Used cars or generic foods

Causes for the Shift in Demand 2. Consumer Expectations Current demand for a good is positively related to its expected future price If you expect the price to rise your demand increases If you expect the price to fall your demand decreases

Causes for the Shift in Demand 3. Population A rise in the population will effect the demand of a certain good Food, houses, cars… 4. Consumer tastes and advertising Fads Advertising makes you want something

Prices of Related Goods Demand can be affected by the change in the price of another good Compliments – two goods that are bought and used together Substitutes goods used in place of one another