1. Law of Demand $ d Qd

2. Demand Porsche Demand: willing and able to purchase
                                     
Demand: willing and able to purchase
a product at a particular time and place

3. Markets Markets: Exist because no one is self-sufficient.
Markets: Are needed to sell what we have and to buy what we want.
A buyer and seller exercise their economic freedoms by working out their own terms of exchange referred to as a Voluntary Exchange.

4. Two Sides of the Market Buying Side Selling Side Consumers Demand side
People who are buying something
Demand side
Selling Side
Producers
People that are producing or selling something
Supply Side

5. Demand Schedule
A demand schedule is a table that lists the quantity of a good a person will buy at each different price.
Bill
Jill
Total
$.50
$.25
A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.

6. Price per slice (in dollars)
The Demand Curve
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50 50
100
150
200
250
300
350
Slices of pizza per day
Price per slice (in dollars)
A demand curve is a graphical representation of a demand schedule.
It slopes downward and to the right.
Only changes in price
Illustrates Law of Demand

7. The Demand Curve
Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.”
When reading a demand curve, assume all outside factors, such as income, are ceteris paribus or held constant, the only change is price.

8. Law of Demand
Price Goes Up
Quantity Demanded Goes Down
Price Goes Down
Quantity Demanded Goes Up
The law of demand states that consumers buy more of a good when its price decreases and less when its price increases.
P=Price QD= Quantity Demanded

9. Price per slice (in dollars)
Law of Demand
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50 50
100
150
200
250
300
350
Slices of pizza per day
Price per slice (in dollars)
Movement along demand curve is always price related
“Price is a mover, not a shifter.”
Called: The Price Effect

10. Law of Diminishing Marginal Utility
Utility: the power a good or service has to satisfy a want
Utility = satisfaction
The more times you purchase an item in a set period of time, the less satisfaction you will receive from the purchase.

11. So What??
More utility - the more you are willing to pay for the product
Less utility - the less you are willing to pay for the product
So…… reflects Law of Demand – you will only purchase more at lower prices

12. Factors that Affect Quantity Demanded
Movement along Demand Curve
Price and Quantity Demanded move in opposite directions because of the law of diminishing marginal utility
Change in Quantity Demanded
Real Income
Substitution Effect

13. REAL INCOME
Real income limits the amount of money people are able to spend.
If the price of a good rises while their income stays the same, individuals cannot keep buying the same quantity.
The real income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income.

14. ↓ Quantity demanded or you buy less
Income Effect
↓ Price
More real income
↑ Quantity demanded
↑ Price
Less real income
↓ Quantity demanded or you buy less

15. SUBSTITUTION EFFECT
The substitution effect occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods.
Suppose two items are not exactly the same, but satisfy basically the same need and their cost is about the same.
If the price of the original item rises, people will substitute the lower-priced good.

16. Substitution Effect
↑ Price of original product
↓ Quantity demanded for original product
↑ Quantity demanded for comparable product (generic)

17. Change in Demand: D
There are 7 factors that will cause the Demand curve to shift to the right or left.
When the curve shifts to the right it is an increase.
When the curve shifts to the left it is a decrease

18. Determinants that cause a shift in the Demand Curve
1. Income
Changes in consumers incomes affect demand – decrease or increase in pay
A normal good is a good that consumers demand more of when their incomes increase. (Ex. Nike)
An inferior good is a good that consumers demand less of when their income increases. (Ex. Top Ramen)
2. Substitutes
if two items satisfy the same need and the price of one rises, people will buy the other.
Examples: butter/margarine or Tide/Cheer

19. Causes a Shift in the Demand Curve
3. Complimentary Good
one product often used with another product; as the price of the second product decreases, the demand for the first product will increase; as the price of the second product increases, the demand for the first product will decrease.
Example: bread/butter or skis/ski boots
4. Seasons – don’t need skis in summer, less demand
5. Population
Changes in the size of the population also affects the demand for most products
Baby boomers have affected every product

20. Causes a Shift in the Demand Curve
6. Consumer Tastes and Advertising
Advertising plays an important role in many trends and therefore influences demand (Ex. bell bottom pants)
7. Consumer Expectations of prices
Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good today (Ex. Freeze of oranges)

21. Elasticity of Demand
Elasticity of demand is a measure of how consumers react to a change in price.
Demand for a good that is very sensitive to changes in price is elastic.
Examples: Coffee, coke, pop.
Demand for a good that consumers will continue to buy despite a price increase is inelastic.
Examples: Electricity, salt, pepper, sugar, certain types of medicine.

22. Factors Affecting Elasticity
1. Substitutes
Few substitutes- demand will not change - inelastic – heart RX
Many substitutes – elastic (margarine brands, bread)
2. Relative importance
Small % of budget – inelastic (toothpaste)
Eating out – larger % of budget - elastic

23. Factors Affecting Elasticity
3. Necessities vs. Luxuries
Necessity demand will not change – inelastic – food
Appendectomy – inelastic – can increase fee by 20% and still will have it
Luxury - diamonds
4. Change over time – longer time to find substitutes – elastic (electricity to natural gas)

24. Total Revenue
A company’s total revenue is the total amount of money the company received from selling its goods or services.
Total revenue = Price X Quantity
Firms need to be aware of the elasticity of demand for the good or service they are providing.
Elastic – Increase in price causes a decrease in total revenue or quantity purchased
Inelastic – Increase in price causes an increase/or stays the same in total revenue or quantity purchased