1. Understanding Demand
Students will be able to identify characteristics of the law of demand.
Students will be able to define and/ or identify the following terms:
Law of Demand
Substitution Effect
Income Effect
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2. Look at this demand curve. What happens to quantity purchased
as prices rise?
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3. Why do we purchase more when a sale
occurs?
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4. The Law of Demand
The law of demand states that consumers buy more of a good when its price decreases.
Conversely, consumers buy less of a good when its price increases.
Consumers love low prices.
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5. It’s obvious, isn’t it? Consumers
love low prices.
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6. The Substitution Effect
One reason that the law of demand exists is the substitution effect.
The substitution effect occurs when a consumer reacts to an increase in a good’s price by buying less of that good and more of a similar yet cheaper good.
When the price of orange juice rises, consumers substitute cheaper apple juice for orange juice.
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7. It really depends on the price, doesn’t it?
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8. The Income Effect
The income effect is the change in consumption resulting from a change in income.
In other words, when prices rise, your money buys less.
Higher prices reduce your purchasing power.
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9. Lower prices allow consumers to increase demand.
Lower prices increase consumers’
purchasing power.
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10. A demand schedule records the quantity demanded at various prices.
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11. A demand schedule can easily be converted to a demand curve.
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12. Economists love graphs because graphs
provide easy understanding of economic
concepts.
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13. If a picture is worth a thousand words, a graph is worth even more.
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14. Questions for Reflection:
State the law of demand.
Provide an example of the substitution effect.
How does the income effect lead to the law of demand?
What is a demand schedule?
What is a demand curve?
Why do economists love graphs?
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