Law of Demand

Marketplace Consumers influence price of goods Demand is how people decide what to buy at what price Supply is how sellers decide how much to sell at what price Marketplace represents the actions between buyers & sellers Give examples of marketplaces where buyers & sellers meet in our society.

Voluntary Exchange Seller sets the price Buyers agree to the product & price through the act of buying the products…called “dollar votes” Supply/demand analysis is a model of how buyers & sellers behave in the marketplace What happens if buyers don’t purchase the product?

Nature of demand: consumer side of economics Demand—amount of goods/services that a consumer is willing and able to various prices during a given time period Quantity demanded—amount of goods/services that a consumer is willing and able to each particular price during a given time period 1. factors of purchase change over time 2. must want it and have means to buy it

Law of Demand increase in goods prices causes a decrease in quantity demanded, and decrease in prices causes an increase in quantity demanded inverse relationship between price and quantity demanded.

3 Concepts to explain the law of demand: (1) Income effect Income Effect—any increase or decrease in the consumer’s purchasing power caused by a change in the price. Usually occurs by someone on fixed income Purchasing power—amount of money people have available to spend on goods/services Increasing purchasing power leads to increase in quantity demanded…also works in reverse Does make consumers more ABLE to buy, but not necessarily more WILLING. Example: You have a $30 allowance and store lowers price of CDs from $15 to $10.

3 Concepts to explain the law of demand: (2) Substitution Effect Substitution Effect— describes the tendency of consumers to substitute a similar, lower-priced product for another that is relatively more expensive 1. increase in price of beef will decrease the quantity demanded for beef and increase the quantity demanded for chicken 2. some goods/services can’t be substituted (milk, gas, salt)

3 Concepts to explain the law of demand: (3) Diminishing Marginal Utility Diminishing Marginal Utility—as more units of a product are consumed, the satisfaction received from consuming each additional unit declines 1. utility—satisfaction received from a product/service 2. explains why demand for a product is not limitless. What are examples of diminishing marginal utility in practice? Can this explain the high divorce rate in our country?

Demand Curves & Schedules Demand Schedules—a table that shows the level of demand for a particular various prices easy to read table Demand Curves—a graphic representation of a demand schedule showing relationships between price and Qty. demanded during a specific time period always a down sloping curve or line, from upper right to lower left of graph

Changes in Demand Shift in Qty. demanded—moves along the demand curve only the only cause is a change in price Shift in demand—demand curve moves left (not up or down) when demand falls at all possible prices; demand curve shifts right when demand all possible prices

Changes in overall Demand: Determinants of Demand consumer tastes & preferences (ex. Bands, clothes, cars) market size--# of consumers entering or leaving markets ex. Advertising, negative press, China, boycotts, gov’t embargoes, new technology (new products) price of related goods—changes in a products price can affect demand of products’ related goods substitute goods—goods that can be used to replace the purchase of similar goods when prices rise ex. Butter for margarine; turkey for ham increase in price leads to an increase in demand for substitute goods complementary goods—goods commonly used with other goods ex. Milk-----oreos, cereal, donuts computers-----monitors, mice, software

Changes in overall Demand: Determinants of Demand consumer expectations—changing what you buy based on the expectations that the price will change in the future or that you income will change in the future ex. Gas, houses, cars income—as income increases, demand increases; as income decreases, demand decreases exceptions are purchasing a higher quality similar good instead of a higher quantity of the same good

Complementary v. Substitute Goods Complete the Chart Below GoodSubstituteComplementary Basketball Laptop Ipod Chicken Concert Ticket Vase Couch

Draw the demand curve below. Add a demand curve to the right & left labeling them D2 & D3. Price QD D Demand for Coke

Determinants of Demand Exercise Now make a list of all 5 determinants of demand. Indented below each determinant write a scenario that would increase or decrease the demand for coke. Then state whether it increased or decreased and which new curve the demand curve would shift to…D2 or D3. Reset to D after each scenario. You must have at least TWO scenarios that increase & decrease the demand.

Elasticity of Demand the degree to which changes in a good’s price affect the quantity demanded by consumers; can be elastic or inelastic Elastic Demand—situation in which the quantity demanded varies greatly to a price change (can change at any price level: any product could be inelastic for one price range and elastic for another). Product has elastic demand if: The product is not a necessity Readily available substitutes Products cost represents a large portion of a person’s income What are examples of products that have elastic demand? Give at least 5.

Elasticity of Demand Inelastic demand-situation in which the quantity demanded varies little when the price changes. inelastic demand if: the product is a necessity (utilities, gas, milk, soap) there are few if any readily available substitutes (gas, soap) product’s cost represents a small portion of person’s income (salt, coffee, candy, sodas, soap, gas) What are some more examples of products that have an inelastic demand?

Elasticity of Demand Elasticity Graphs elastic is fairly steeply downward sloping inelastic is relatively constant at certain price

Measuring Elasticity Total Revenue Test total revenue—total income a business receives from selling its products Total Revenue and Elastic Demand a drop in a business’s total revenue from a price increase indicates an elastic demand for the product Total Revenue and Inelastic Demand a rise in a business’s total revenue because of a price increase results in an inelastic demand for the product Maximizing Total revenue measuring the varying elasticity of demand for a product directs owners toward pricing decisions that will earn the most revenue