Demand

Demand is: The amount of goods and services that consumers are willing and able to buy at various prices. Illustrated by the demand curve. Reflects different quantities at various prices Does not reflect supply

Law of Demand As price goes up, quantity demanded goes down. As price goes down, quantity demanded goes up SO P causes Qd Demand varies inversely with changes in price

Demand Schedule vs. Curve The Schedule is a list of prices and quantity demanded at each price. The Demand Curve is a graphic illustration of the demand schedule.

Quantity Demanded The amount of goods and services that will be bought at a specific time and at a specific price. It’s illustrated by one point on the demand curve, not the whole line. (A) A change in price causes quantity demanded to change (A to B) A change in quantity demanded is illustrated by a shift along the line. From point a to point b The dot represents one quantity demanded A B

Demand Curve Price will always go on the vertical axis (Y axis) Quantity will always go on the horizontal axis (x axis) The demand curve will always be drawn as going down and to the right. Why? The law of demand, that’s why.

Demand as Illustrated on a curve Demand is different than quantity demanded. Demand is represented by the combination quantities demanded. It’s the whole line. A B

Determinants of Demand Factors that cause the demand curve to shift. Different than a change in quantity demanded. Something other than price causes demand to change. The whole curve shifts left (decrease) or right (increase). At every single price, you are willing to purchase more, or less of a product.

Complements Complements – You are soooo good looking…..no not that type of compliment. Goods used with other goods. Yeah that’s it. Ex. Peanut butter AND Jelly Qd for Peanut butter increases, D of jelly increases. Jelly

Income Either actual or expected changes in income change demand. Expect a raise, demand increases. Expect to lose your job, demand decreases. Affect both willingness and ability to purchase. Increase in income increases demand for almost all products. Inverse is true as well.

Taste No….not the taste that goes Yum, Yum. Preferences, fashions and fads. Popularity Demand is affected by information about the product. Ex. People prefer Coke to Pepsi. D for Coke increases, D for Pepsi decreases.

Expected Price Change The price hasn’t actually changed yet, it’s in the future. When we expect price to increase in the future, buy now before it goes up. Or….wait until the price comes down. Our expectations drive demand, and prices, more than anything else.

Substitutes Goods used instead of other goods. Use the word OR in between the two goods and usually they are substitutes. Ex. Ham or Turkey for a sandwich Demand varies inversely with substitutes. D ham increases, d turkey decreases.

Elasticity of Demand The degree to which the quantity demanded changes in response to a change in price. Elastic = small change in price results in big change in quantity demanded Illustrated by shallow slope of demand curve. If elasticity is greater than 1, demand is elastic

Inelastic Demand Quantity demanded is NOT very responsive to changes in price. Even a large change in price results in relatively little change in demand. If Elasticity is less than 1, demand is said to be inelastic.

Determinants of Elasticity Ability to postpone the purchase. not able to postpone = inelastic if able to postpone easily, elastic Availability of substitutes No substitutes = inelastic Substitutes = elastic Proportion of income consumed large percent = elastic small percent = inelastic

Calculating Elasticity First, you need to find the percent change in demand: (Original Demand – New Demand)/Original Demand Then you need to find the percent change in Price: (Old Price – New Price)/Old Price Lastly: %Change in Demand / Percent Change in Price = Elasticity

Practice Calculating Elasticity Increase in Price Decrease in Demand for Sneakers Percent Change in Demand Percent Change in Price Elasticity of Demand $40 to $50210 to 180 $50 to $60180 to 150 $60 to $70150 to 120 $70 to $80120 to 90 $80 to $90$90 to $60 What price changes show inelastic demand? Why is demand elastic at some prices and inelastic at others? How would demand have to change for a price change to be unitary elastic? Increase in Price Decrease in Demand for Sneakers Percent Change in Demand Percent Change in Price Elasticity of Demand $40 to $50210 to $50 to $60180 to $60 to $70150 to $70 to $80120 to $80 to $9090 to