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E. Napp 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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E. Napp Look at this demand curve. What happens to quantity purchased as prices rise?
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E. Napp Why do we purchase more when a sale occurs?
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E. Napp 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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E. Napp It’s obvious, isn’t it? Consumers love low prices.
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E. Napp 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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E. Napp It really depends on the price, doesn’t it?
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E. Napp 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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E. Napp Lower prices allow consumers to increase demand. Lower prices increase consumers’ purchasing power.
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E. Napp A demand schedule records the quantity demanded at various prices.
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E. Napp A demand schedule can easily be converted to a demand curve.
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E. Napp Economists love graphs because graphs provide easy understanding of economic concepts.
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E. Napp If a picture is worth a thousand words, a graph is worth even more.
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E. Napp 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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