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Demand
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Demand Schedule P QD Oranges $4/lb. .5 million $3/lb. 1million $2/lb.
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Law of Demand
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Law of Demand As P , QD (As P , QD )
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Law of Demand As P , QD (As P , QD )
There is an inverse relationship between P and QD
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Law of Demand As P , QD (As P , QD )
There is an inverse relationship between P and QD NOT As P , D
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Law of Demand As P , QD (As P , QD )
There is an inverse relationship between P and QD NOT As P , D NOT As QD , P
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Law of Demand As P , QD (As P , QD )
There is an inverse relationship between P and QD NOT As P , D NOT As QD , P NOT As D , S
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Demand Curve P $4 $3 $2 D QD .5m m m Oranges
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Demand Curve P P2 QD P1 D QD Q2 Q1 Oranges
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Shape and Slope of a Demand Curve
Negative (slopes downward from l-r) Why? Law of Demand (inverse relationship between P and Q) Why true? Income Effect Substitution Effect
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Shape and Slope of a Demand Curve
Curved (not a straight line) Why? Law of Diminishing Marginal Utility (the ice cream effect)
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A change in price can only cause a change in quantity demanded, not a change in demand.
A change in quantity demanded is a movement along the demand curve. Each point on the curve represents the quantity demanded at a particular price.
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Changes in Demand Demand is all the possible quantities consumers are willing and able to buy at various prices. Therefore, a change in demand is a shift in the whole curve. An increase in demand is a shift to the right. A decrease in demand is a shift to the left.
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People are now willing and able to buy more at all prices.
Increase in Demand P People are now willing and able to buy more at all prices. P2 D1 P1 D QD Q2 Q3 Q1 Oranges
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Determinants of Demand (causes a change in demand)
Consumer Tastes / Preferences (advertising industry) Income normal goods inferior goods Change in the price of a related good Substitutes
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Papples QDapples Doranges QDoranges
Substitutes P P D P2 QD P1 P1 D1 D D Q Q1 Q2 Q Q2 Q1 Oranges Apples Papples QDapples Doranges QDoranges
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Determinants of Demand (causes a change in demand)
Consumer Tastes / Preferences (advertising industry) Income normal goods inferior goods Change in the price of a related good Substitutes Complements
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PPB QDPB DJelly QDJelly
Complements P P D P2 QD P1 P1 D D D1 Q Q2 Q1 Q Q2 Q1 Jelly Peanut Butter PPB QDPB DJelly QDJelly
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Determinants of Demand (causes a change in demand)
Consumer Tastes / Preferences (advertising industry) Income normal goods inferior goods Change in the price of a related good Substitutes Complements Future Price Expectations Number of Consumers
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Price Elasticity of Demand
Q Q Gas Movies
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Price Elasticity of Demand
Measures how responsive quantity demanded is to a change in price Gas is inelastic (not very responsive) Movies are elastic (very responsive) Determinants of Elasticity Necessity or Luxury? Number of Substitutes? Portion of Budget?
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Total Revenue Test Total Revenue (TR) = P x Q
If P, and TR, then D is inelastic If P, and TR, then D is elastic If P, and n/c TR, then D is unit elastic
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Total Revenue Test Movie Prices Ticket Price Tickets Sold
$ x = $600 $ x = $640 (inelastic) $ x = $400 (elastic) $ x = $600 (unit elastic)
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