1. Demand: The desire to own something and the ability to pay for it
Understanding Demand
Demand: The desire to own something and the ability to pay for it

2. Law of Demand: Consumers will buy more of a good when its price is lower and less when its price is higher

3. Law of Demand As Price goes down from P1 to P2…
…then Quantity demanded goes up from Q1 to Q2

4. Law of Demand And the opposite is true as well:
When the Price goes up from P1 to P3…
…the Quantity demanded goes down from Q3 to Q1

5. Law of Demand Substitution Effect:
When consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good

6. Law of Demand Income Effect:
The change in consumption that results when a price increase causes real income to decline – you “feel" poor
The opposite is true as well – when prices decrease you feel richer

7. Demand Schedules
A table that lists the quantity of a good a person will buy at different prices

8. Demand Curves
A graphic representation of a demand schedule

9. Elasticity of Demand for Consumers
A measure of how consumers respond to price changes –
Or…how strongly you will react to a change in price for a given good
Things to keep in mind
The original price
How much you want the item

10. Elasticity of Demand Inelastic Demand:
The quantity demanded responds only slightly to changes in price
Necessities tend to have inelastic demand
Dr. office visits
Basic Food items
???

11. Elasticity of Demand for Consumers
Inelastic Demand:
Keep buying even if price increases a lot !!
Demand that is not very sensitive to price changes.
Substitutes are not available
Seen as a necessity
No time to react in the short run
Value calculated is less than 1

12. Examples of Inelastic Demand
Concert tickets to your favorite band ever!!
Life saving medicines
Insulin
Gasoline (in the short run)
Water (if you’re in the desert)
Some foods
Milk, orange juice, etc.

13. Inelastic Demand Calculation
$6 –$ 2 X 100 = 67 $ 6 10 – 15 X 100 = % = %
Take old price minus new price and divide by old price times 100
Take old quantity minus new quantity and divide by old quantity times 100
Divide percent change in quantity by percent change in price
If answer is less than 1 the demand is inelastic

14. Elasticity of Demand Elastic Demand:
Stop buying as much even if price increases just a little – demand is very sensitive to price changes
The quantity demanded responds substantially to changes in price
Luxuries tend to have elastic demand
Gold
Ice Cream
???

15. Elasticity of Demand for Consumers
Elastic Demand:
Demand that is very sensitive to a change price
Substitutes are available
May be seen as a luxury
Substitutes can be found in the long term
Value calculated is greater than 1

16. Examples of Elastic Demand
Some restaurants
Small increases in price may
Make you eat out less
Switch to a cheaper place
Gasoline (in the long run)
Some foods
Steak, lobster
Even a small increase in price may cause your family to cut out these foods

17. Elastic Demand Calculation
$4 - $3 X 100 = 25 $4 10 – 20 X 100 = % = %
Take old price minus new price and divide by old price times 100
Take old quantity minus new quantity and divide by old quantity times 100
Divide percent change in quantity by percent change in price
If answer is greater than 1, than demand is elastic

18. Elasticity of Demand for Consumers
Unitary Elastic Demand:
Increases or decreases in price have a corresponding increase or decrease in demand
The percentage change in quantity demanded equals the percentage change in price
So, the value calculated is exactly equal to 1

19. Factors that affect Elasticity
Availability of Substitutes
Few substitutes means you still buy it even if price increases (heart transplant)
Relative Importance
How much of your budget do you spend on those goods
If you spend a lot of your income on clothing even a modest increase in clothing costs will cause a reduction in the quantity you purchase

20. Factors that affect Elasticity
Necessities vs. Luxuries
This is a personal decision on what you consider to be a product you will always buy despite price increases
Changes that occur over time
Do you have time to react to the price change or not?

21. Who cares??? Businesses Consumers
Need to always be aware of how much they can charge consumers and make the most profit
How much money are you willing to spend on various products…
Can you substitute?
Is it a necessity or luxury?
How will the purchase effect your overall budget?
Where will you shop?
How much will you buy?
Do you have time to react to changes in pricing?

22. The End 
Blah, blah, blah, blah
Etc………

23. Elasticity of Demand for Consumers
Questions:
Suppose the price of a certain life-saving medicine rises by 50%.
In the month following the price change, sales decrease by 5%. Is the demand elastic or inelastic?

24. Elasticity of Demand for Consumers
Inelastic:
5% divided by 50% equals 0.1 elasticity of demand.
After a year, sales of the medicine decrease by 50%. What might have happened?

25. Elasticity of Demand for Consumers
People had time to find new substitutes or other companies started making a similar product