Demand Revisited SSEMI1: Explain how the Law of Demand works to determine production and distribution of goods and services

Demand Basics What is demand? The desire to own something and the ability to pay for it What is the Law of Demand? Economic law that explains consumers will buy more of a good when prices decrease, and less of a good when prices increase

What does a demand curve look like? Most demand curves are downward sloping (rise to the left) Illustrates Law of Demand (the quantity demanded increases when the price of a good decreases)

Movements Along Demand Curve Movements along the demand curve are caused by changes in PRICE When prices change, there’s a change in the quantity demanded

Shifts of the Demand Curve The demand curve will shift to the left when there’s a decrease in demand

The demand curve will shift to the right when there’s an increase in demand

What causes a shift in the demand curve? Income Income Consumer Expectations Consumer Expectations Population/Number of Buyers in a Market Population/Number of Buyers in a Market Consumer Preferences and Advertising Consumer Preferences and Advertising Prices of Related Goods Prices of Related Goods

Non-Price Determinants of Demand Relationship with the Demand Curve Examples Income (Normal Goods) Direct A decline in income decreases the demand for air travel Income (Inferior Goods) Inverse A decline in income increases the demand for public transportation. Consumer Expectations Direct Current gas shortage Population/Number of Buyers Direct An increase in the birthrate increases the demand for baby clothes Consumer Tastes/Preferences and Advertising Direct Prices of Related Goods (Complements) Inverse A higher price for cd players decreases the demand for cds Prices of Related Goods (Substitutes) Direct An increase in the price of SUVs causes increased demand for cars.

What is Elasticity of Demand? Measures buyers’ responsiveness to price changes Measures buyers’ responsiveness to price changes Shows how drastically buyers will cut back (or increase) their demand for a good when the price rises (or falls) Shows how drastically buyers will cut back (or increase) their demand for a good when the price rises (or falls)

Inelastic and Elastic Demand If a consumer will continue to buy a good/service despite a price increase, demand is inelastic (unresponsive to price changes) If a consumer will continue to buy a good/service despite a price increase, demand is inelastic (unresponsive to price changes) If a consumer will buy much less of a good after a price increase, the demand for that good is elastic (responsive to price changes) If a consumer will buy much less of a good after a price increase, the demand for that good is elastic (responsive to price changes)

When the income in households increases, what is the likely result? A The supply curve will shift to the left B The supply curve will right vertical C The demand curve will shift to the left D The demand curve will shift to the right Housing Market

The graph shows demand and supply curves. What can be said about the demand between D 1 and D 2 ? A.Demand has decreased B.Demand has increased C.This indicates an increased supply D.This indicates a decreased supply

Which of the following will cause a movement along the demand curve? A.A change in the price of a close substitute B.A change in the price of good X C.A change in consumer tastes and preferences for good X D.A change in consumer income

Assuming steak and potatoes are complements, a decrease in the price of steak will A decrease the demand for steak B increase the demand for steak C decrease the demand for potatoes D increase the demand for potatoes

Assuming that beef and pork are substitutes, a decrease in the price of pork will cause the demand curve for beef to A shift to the left as consumers switch from beef to pork Bshift to the right as consumers switch from beef to pork Cremain unchanged because beef and pork are sold in different markets Dnone of these choices

Myra Worthington, CEO of CompuGlobal Corporation, complains that the company’s software products have a very high elasticity of demand. What is Myra saying? A the higher the demand for her product the lower its price B small changes in price result in large changes in quantity demanded C no matter what the price, people want the same quantity of her product D Consumers don’t want her product if she lowers the price too much