DEMAND Definition: The various quantities of a good or service that someone is WILLING and ABLE to buy at DIFFERENT PRICES at a PARTICULAR TIME WILLING.

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Presentation transcript:

DEMAND Definition: The various quantities of a good or service that someone is WILLING and ABLE to buy at DIFFERENT PRICES at a PARTICULAR TIME WILLING and ABLE Does Mr. Bull have demand for…?:

YES!

NO!!!

NO!

Individual Demand vs. Market Demand I may not have demand for a porsche, but others do… Market Demand – Sum of all individual’s demand

Demand Schedule Grade Upgrade Certificates

Graphing Demand Demand ScheduleDemand Curve

Law of Demand As Price increases, Quantity Demanded decreases As Price decreases, Quantity Demanded increases As P↑, Qd↓ As P↓, Qd↑

Nature of Demand Curve Diminishing marginal utility What would compel you to buy additional JBCs?

Change in Quantity Demanded Income Effect Buying power Substitution Effect Pepsi vs. Coke

Change in Quantity Demanded

Change in Demand 1.Change in Income mo’ money = mo’ problems purchases normal vs. inferior 2.Change in Prices and Availability of Substitutes ex: Pens and Pencils 3.Change in Prices and Availability of Complements ex: Paper and Pencils 4.Change in Weather or Seasons ex: Shorts in winter, Sleds in summer, Gas? 5.Change in Number of Buyers ex: larger/smaller market, population change, technology 6.Change in Styles, Tastes, Habits, Preferences fashion, coolness, trends – ex: 7.Change in Expectations future oriented – ex: harvest, technology

Individual Demand Quantity Demanded (bushels per week) Price (per bushel) PQdQd $ Individual Demand P Q D1D Demand Can Increase or Decrease Increase in Demand Decrease in Demand D2D2 D3D3 3-14

Individual Demand Quantity Demanded (bushels per week) Price (per bushel) PQdQd $ Individual Demand P Q D1D Demand Can Increase or Decrease Decrease in Demand D2D2 D3D3 Change in Demand Change in Quantity Demanded 3-15

Elasticity Measurement of a good’s responsiveness to a change in price The price effect is greater for some goods than for others Examples:

Elasticity Large Price Effect → Elastic Ex: Small Price Effect → Inelastic Ex: Other Examples?

Factors Affecting Elasticity Time: Can purchase be delayed? Time to adjust… Longer price change persists = more elastic Immediately after price change = more inelastic Availability, Suitability, Price of Substitutes More/better/cheaper substitutes = more elastic Ex: Ibuprofen vs. Insulin Percentage of Budget Larger % = more elastic Ex: New Car for me vs. LeBron James

Testing for Elasticity Graphical Comparison The flatter the curve, the more Elastic the good. The steeper the curve, the more Inelastic the good. Inelastic Elastic

Testing for Elasticity Total Revenue Test --- TR = P x Q Example: If P and TR move in the same direction, demand is inelastic If P and TR move in opposite directions, demand is elastic Grade Upgrade Certificates? Gas?

Extending Elasticity How does elasticity of demand affect us? What do these have in common? Government taxes inelastic goods… Why? Why doesn’t govt. tend to tax elastic goods?