Demand Ch. 4

What Is the Law of Demand? As Prices go down quantity demanded goes up

Law of Demand (cont.) As prices go up quantity demanded goes down

Quantity Demanded The amount of a good or service that will be purchased at a specific price Quantity demanded (Qd) – is just a point on the curve Only price can change the Qd

Individual Demand Schedule Market Demand Schedule The Demand Schedule Demand Schedules Individual Demand Schedule Price of a slice of pizza Quantity demanded per day Market Demand Schedule Price of a slice of pizza Quantity demanded per day $.50 $1.00 $1.50 $2.00 $2.50 $3.00 5 4 3 2 1 $.50 $1.00 $1.50 $2.00 $2.50 $3.00 300 250 200 150 100 50

Price per slice (in dollars) The Demand Curve Market Demand Curve 3.00 2.50 2.00 1.50 1.00 .50 50 100 150 200 250 300 350 Slices of pizza per day Price per slice (in dollars) When reading a demand curve, assume all outside factors, such as income, are held constant. Demand

Shifts in Demand Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.” When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.

What Causes a Shift in Demand? Several factors can lead to a change in demand: 1. Income – Normal Goods & Inferior Goods 2. Population or the number of consumers 3. Consumer expectations

4. Consumer tastes & advertising 5. Prices of Related goods Cont. 4. Consumer tastes & advertising 5. Prices of Related goods Price of a substitute Price of a complement

What Is Elasticity of Demand? Elasticity of demand is a measure of how consumers react to a change in price.

Inelastic Demand for a good that consumers will continue to buy despite a price increase Consumers are not very sensitive to an increase in price

Elastic Demand for a good that is very sensitive to changes in price A small change in price leads to relatively large change in the Qd

Calculating Elasticity Elasticity = percentage change in in quantity demanded/ percentage change in price Or E= % change in Qd/ % change in P Percentage change = original number – new number/ original number x 100

Values of Elasticity Elasticity is< 1 = inelastic Elasticity is > 1 = elastic Elasticity is “0” = unitary

Factors Affecting Elasticity 1. Availability of Substitutes 2. Relative importance 3. Necessities vs. Luxuries 4. Change over time