Economics Unit Three Part I: Demand

Demand Essentially, demand is the willingness (or desire) to buy a good or service and the ability to pay for it.

The Law of Demand Holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good – There is an inverse, or negative, relationship between the price and the quantity demanded of a good

The Law of Demand When the price of a good or service goes up, the quantity demanded goes down When the price of a good or service goes down, the quantity demanded goes up

Demand Schedules A demand schedule is a table that summarizes one consumer’s behavior lists how much of an item an individual will buy at various prices A market demand schedule is a table that summarizes all consumers’ behavior lists how much of an item all consumers will buy at various prices

Demand Schedule Using this market demand schedule, the Law of Demand would state: “Holding all else equal, when the price of a small soda rises, consumers decrease their quantity demanded for a small soda.”

Demand Schedules Business owners need information about consumer demand – Help them price goods to get the most sales They get this information from market research – Information/data is gathered and evaluated about consumer preferences

Demand Curves Demand curves graphically show information found on demand schedules A demand curve is a graph that shows the amount of an item a consumer will buy at each price A market demand curve shows the amount all consumers will buy at each price – Illustrates the inverse relationship between price and quantity Assumes all economic factors are constant except price

Demand Curves On a demand curve: – Price is shown on the vertical axis (y-axis) – Quantity demanded is shown on the horizontal axis (x-axis) Demand curves slope down from upper left to lower right

Important Demand Curves Factors Law of diminishing marginal utility – Marginal benefit of each additional unit declines as each unit is used Income effect – Amount people buy changes as purchasing power of their income changes Substitution effect – Amount people buy changes as they buy substitute products

Change in Quantity Demanded The change in quantity demanded is a change in the amount consumers buy because of a change in price – Each change is shown by a new point on the demand curve (either left or right)

Change in Demand A change in demand is caused by a change in the marketplace – This prompts people to buy different amounts at every price More at lower prices, less at higher prices

Change in Demand There are 6 factors which can cause a change in demand – Income – Market size – Consumer tastes – Consumer expectations – Substitutes – Complements

Change in Demand: 6 Factors Income – A person’s ability to purchase goods changes as his or her income changes – As incomes of most consumers in a market change (promotion, demotion, new job, no job, etc.), so does total demand in a market Normal goods are demanded more when consumers’ incomes rise Inferior goods demanded less when consumers’ incomes rise

Change in Demand: 6 Factors Market Size – As the number of consumers in an area changes, so does market size – Demand for most goods changes as market size grows Rise in population leads to increased demand Decrease in population leads to decreased demand

Change in Demand: 6 Factors Consumer Tastes – Consumer tastes change Products gain and lose popularity Think: hot trends – Consumers demand a greater amount of popular items at every price – Sellers advertise to create demand for products

Change in Demand: 6 Factors Consumer Expectations – Expectations about future price of items affect individual behavior Expected rise or fall in price can decide whether to buy now or wait – Expectations of all consumers in a market affect demand Ex.: Because cars go on sale at the end of summer in preparation for the next years models, demand goes up then

Change in Demand: 6 Factors Substitutes – These are products used in place of another If a price of a substitute drops, people buy it instead of the original item If price of the original item rises, people will buy the substitute

Change in Demand: 6 Factors Complements – These are goods that are used together A rise in demand for one increases the demand for the other – If the price for one product changes, demand for both changes in the same way – If the price of one rises, demand for both will drop

Factors of Elasticity of Demand Elasticity of demand is a measurement of how responsive consumers are to price changes – Elastic: the quantity demanded changes greatly as price changes Higher prices = lower demand Lower prices = higher demand – Inelastic: the quantity demanded changes little as price changes

Factors of Elasticity of Demand There are 3 factors that affect the elasticity of demand – The availability of substitutes – The proportion of income spent on a good or service – Whether the product is a necessity or a luxury

Factors of Elasticity of Demand The availability of substitutes – If no there is no substitute for a product, demand tends to be inelastic When the price of gas goes up, people still need to put gas in their cars – If there are substitutes for a product, demand tends to be elastic When beef prices go up, people buy other meats

Factors of Elasticity of Demand The proportion of income spent on a good or service – Demand for expensive items tend to be elastic If the percentage of income needed to buy a item increases, demand decreases – Demand for inexpensive items tends to be inelastic A rise in price requires using a smaller additional percentage of one’s income – A rise in income can lead to greater demand for some goods and services More disposable income

Factors of Elasticity of Demand Whether the product is a necessity or a luxury – Necessity: something needed for life The demand for necessities is inelastic – Luxury: something desired but not essential Demand for luxuries tend to be elastic – These are basically the same as needs and wants