LAW OF DEMAND a. Define the Law of Supply and the Law of Demand.

LAW OF DEMAND  The Law of Demand states that consumers will be motivated to buy more goods and services at lower prices than at higher prices  as price increases, the quantity demanded decreases  there is an inverse relationship between price and quantity demanded on the demand curve in a market  remember that the demand curve is downward-sloping by remembering that demand starts with the letter D for Downward-sloping

3 CONCEPTS THAT EXPLAIN THE LAW OF DEMAND  Income Effect  Substitution Effect  Diminishing Marginal Utility

DEMAND SCHEDULE A DEMAND SCHEDULE SIMPLY SHOWS THE QUANTITY DEMANDED AT SEVERAL DIFFERENT PRICES.

A DEMAND CURVE IS JUST A GRAPHIC ILLUSTRATION OF A DEMAND SCHEDULE SHOWING THE RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED.

CHANGE IN QUANTITY DEMANDED VS. CHANGE IN DEMAND Change in quantity demanded Change in demand

DETERMINANTS OF DEMAND  Factors that cause the entire demand curve to shift to the right or left, instead of merely causing movement along the curve.

5 DETERMINANTS  Consumer taste and Preference  Market Size  Income  Prices of Related Goods  Consumer Expectations

TASTES AND PREFERENCES  This slide illustrates how increased popularity of a good causes the Demand Curve to shift to the right. The demand increases at every possible price. People are willing to pay more because it is in style.

MARKET SIZE  The larger the market the more demand.  Before the ad campaign few people knew of the product but after running a tv commercial in a large city more people are aware of the product which causes an increase in demand.

DEMAND AND MARKET SIZE  An increase in the number of buyers results in an increase in demand. A national ad campaign increases awareness of a product. A decrease in buyers (in red) would result in the curve shifting left.

INCOME EFFECT  As income increases it generally causes an increase in demand.

INCOME AND DEMAND: NORMAL GOODS  A good is a normal good if an increase in income results in an increase in the demand for the good. T-BONE STEAK

INCOME AND DEMAND: INFERIOR GOODS  A good is an inferior good if an increase in income results in a reduction in the demand for the good. This demand curve is for Spam, when the minimum wage rises more people buy steak instead of Spam resulting in a decreased demand for Spam. SPAM

PRICE OF RELATED GOODS  Substitute Goods  Products that can be used to replace the purchase of similar goods when prices rise.

CHANGE IN THE PRICE OF A SUBSTITUTE GOOD  Price of coffee rises: The rise in coffee prices causes some people to switch to Tea as a substitute, as a result the Demand Curve for Tea shifts to the right.

COMPLEMENTARY GOODS COMPLEMENTARY GOODS ARE GOODS THAT ARE USED TOGETHER SUCH AS HOT DOGS AND HOT DOG BUNS OR PAINT AND PAINT BRUSHES. WHEN THE PRICE OF ONE CHANGES IT CHANGES NOT ONLY THE QUANTITY DEMAND FOR THAT ITEM BUT ALSO FOR ITS COMPLEMENT. PRICE OF HOT DOGS RISES WHICH CAUSES NOT ONLY THE QUANTITY DEMANDED FOR HOT DOGS TO DECREASE BUT ALSO THE DEMAND FOR HOT DOG BUNS TO SHIFT TO THE LEFT.

CHANGE IN THE PRICE OF A COMPLEMENTARY GOOD  Price of DVDs rises: because the price of DVD’s has risen fewer people are buying DVD players.

CONSUMER EXPECTATIONS

EXPECTATIONS  A higher expected future price will increase current demand.  A lower expected future price will decrease current demand.  A higher expected future income will increase the demand for all normal goods.  A lower expected future income will reduce the demand for all normal goods.