Consumer Demand

Patterns of Spending About 70% of a household ’ s budget is spent on housing, transportation, food, and health expenditures. About 70% of a household ’ s budget is spent on housing, transportation, food, and health expenditures. “ Essential ” items have changed from years ago. “ Essential ” items have changed from years ago.

How the Consumer Dollar Is Spent

What is Demand? Demand – The ability and willingness to buy specific quantities of a good or service at alternative prices in a given time period. Demand – The ability and willingness to buy specific quantities of a good or service at alternative prices in a given time period.

What Creates Demand? The desire for goods and services arises from our needs for social acceptance, security, and ego gratification. The desire for goods and services arises from our needs for social acceptance, security, and ego gratification. “ Keeping up with the Joneses ” “ Keeping up with the Joneses ” Self preservation Self preservation Expressions of affluence Expressions of affluence

Affluent Teenagers

Demand Depends on… Tastes - desire for this and other goods: Tastes - desire for this and other goods: If a study says ice cream is good for you, the demand for ice cream would increase. If a study says ice cream is good for you, the demand for ice cream would increase.

Demand Depends on… Income (of the consumer): Income (of the consumer): If you won the lottery you might buy more ice cream. If you won the lottery you might buy more ice cream.

Demand Depends on… Expectations (for income, prices, tastes) Expectations (for income, prices, tastes) If you knew you were going to get rich soon you might deplete savings to buy more ice cream now. If you knew you were going to get rich soon you might deplete savings to buy more ice cream now. This would increase the demand for ice cream. This would increase the demand for ice cream.

Demand Depends on… Other goods (their availability and price): Other goods (their availability and price): If the price of chocolate candy bars increased, you might buy ice cream instead of a candy bar. If the price of chocolate candy bars increased, you might buy ice cream instead of a candy bar. This would increase the demand for ice cream. This would increase the demand for ice cream.

Demand Depends on… The number of consumers in the market: The number of consumers in the market: If the number of buyers in the ice cream market increased, the demand for ice cream would also increase. If the number of buyers in the ice cream market increased, the demand for ice cream would also increase.

Determining Price Economists assume that the more pleasure a product gives, the higher price buyers are willing to pay. Economists assume that the more pleasure a product gives, the higher price buyers are willing to pay. Students who like butter are willing to pay more for buttered popcorn than non-buttered popcorn because they like it more. Students who like butter are willing to pay more for buttered popcorn than non-buttered popcorn because they like it more.

Price and Quantity Many forces determine how much we are willing to buy. Many forces determine how much we are willing to buy. Economists focus on the relationship between price and quantity rather than trying to explain all the forces at once. Economists focus on the relationship between price and quantity rather than trying to explain all the forces at once.

Law of Demand With given income, tastes, expectations, and prices of other goods and services, people are willing to buy additional quantities of a good only if its price falls. With given income, tastes, expectations, and prices of other goods and services, people are willing to buy additional quantities of a good only if its price falls. Think About: Think About: A student who buys popcorn… The first box consumed is very rewarding. The second box is good. The third box is decent, etc. (The student will not want to buy more popcorn unless the price falls at some point.)

Law of Demand According to the law of demand, the quantity of a good or service demanded in a given time period increases as its price falls. According to the law of demand, the quantity of a good or service demanded in a given time period increases as its price falls.

Prices Differences in prices are explained by several factors: Differences in prices are explained by several factors: Necessities vs. Luxuries Necessities vs. Luxuries Availability of Substitutes Availability of Substitutes Price Relative to Income Price Relative to Income

Necessities vs. Luxuries Some goods are so critical to our everyday life that we regard them as necessities. Some goods are so critical to our everyday life that we regard them as necessities. Demand for necessities is relatively stable. Demand for necessities is relatively stable.

Necessities vs. Luxuries A luxury good is something we ’ d like to have but aren ’ t likely to buy unless our income jumps or the price declines sharply. A luxury good is something we ’ d like to have but aren ’ t likely to buy unless our income jumps or the price declines sharply. Demand for luxury goods is relatively unstable. Demand for luxury goods is relatively unstable.

Availability of Substitutes The greater the availability of substitutes, the higher the probability that the price will be stable (the same). The greater the availability of substitutes, the higher the probability that the price will be stable (the same). The smaller the availability of substitutes, the lower the probability that the price will be stable. The smaller the availability of substitutes, the lower the probability that the price will be stable.

Price Relative to Income If the price of a product is very high relative to the consumer ’ s income, the demand will tend to be unstable (changeable). If the price of a product is very high relative to the consumer ’ s income, the demand will tend to be unstable (changeable). If the price of a product is very low relative to the consumer ’ s income, the demand will tend to be stable. If the price of a product is very low relative to the consumer ’ s income, the demand will tend to be stable.

The Role of Advertising Advertising campaigns are often designed to exploit our senses and lack of knowledge. Advertising campaigns are often designed to exploit our senses and lack of knowledge. Advertising makes us want to buy things and use services. Advertising makes us want to buy things and use services.