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Chapter 4.  Demand – the desire AND ability to own or purchase  Does not refer to wishes or dreams  Law of Demand – the more it costs, the less you.

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Presentation on theme: "Chapter 4.  Demand – the desire AND ability to own or purchase  Does not refer to wishes or dreams  Law of Demand – the more it costs, the less you."— Presentation transcript:

1 Chapter 4

2  Demand – the desire AND ability to own or purchase  Does not refer to wishes or dreams  Law of Demand – the more it costs, the less you buy, the less it costs the more you buy  Inverse relationship  Quantity Demanded –how much of a given product someone buys given their income and preferences at any specific price I Want That! http://www.youtube.com/watch?v=3n3LL338a GA

3  Demand refers generally to the whole range of quantities that a person, with a given income and preferences, is willing and able to buy at various prices generally  Quantity Demanded (QD) refers specifically to a person’s demand at an exact price given other factors

4  Diminishing marginal utility explains the law of demand  As a person consumes more of a good, the satisfaction gained from each additional unit decreases  Thus, the less satisfaction you get from something, the lower the price you are willing to pay  Consequently, as more units of a good are consumed and utility decreases, a consumer is only willing to purchase more at a lower price

5  Perhaps the prices of Disney tickets also depends on quantity demanded.  Consider this price schedule One day ticket --$63 Two day ticket --$85 Three day ticket--$109 Four day ticket --$129 Five day ticket --$139  What pattern do you see? Is there an explanation?

6 2 Occurrences: 1. Substitution Effect – switching to similar products because of prices. 2. Income Effect – rising prices cause people on a fixed income to buy less as more of your income goes to purchasing something with a higher price

7  Demand Schedule – table that lists the quantity of a good that a person will purchase at each price in the market. Price of a slice of Pizza Quantity Demanded.505 $1.004 $1.503 $2.002 $2.501 $3.000

8  MDS – shows the quantities demanded at each price by ALL consumers in the market  It is the sum of all the individual demands in a given market Price of a slice of pizza Quantity demanded per day.50300 $1.00250 $1.50200 $2.00150 $2.50100 $3.0050

9  Demand graph – graphic representation showing the relationship between price and quantity demanded.  Also called Demand Curve  Slopes downward illustrating the Law of Demand

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11  2 things change demand: prices and everything else  If prices change you move along the curve  If something else happens to alter the quantity demanded, or how much of something you would buy at any given price —demand shifts  Changes in price don’t shift the curve, but other factors do  This is called a “change in demand” http://www.youtube.com/watch?v=R6ojYtKazgQ

12  Income – more income, consumers purchase more  Increase in demand – shift to right  Decrease in demand – shift to left  Normal goods – goods consumers demand more of as income increases  Inferior goods – increase in income causes a decrease in demand http://www.youtube.com/watch?v=Ng3XHPdexNM&feature=related

13  Consumer Expectations – expectations about the future affects today’s demand  Population – greater population demands more goods and services  Tastes & Advertising – social trends, marketing  Price of Related Goods –  Compliments – two goods bought and used together (pizza and soda)  Substitutes – goods used in place of each other. http://www.adcracker.com/creativeideas/Advertising_Techniques.htm http://www.foothilltech.org/rgeib/english/media_literacy/advertising_techniques.htm

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16  Elasticity of demand – how drastically buyers cut back or increase their demand for a good when the price changes.  Inelastic – demand does not change when price does  Elastic – great change in demand when price changes http://www.pbs.org/wgbh/pages/frontline/sho ws/cool/

17  Availability of substitutes – can you you substitute?  Time Horizon—short run versus long run  Necessities vs. Luxuries – what do you need vs. what do you want?  Changes over time – habits, styles, trends, advertising  Definition of the Market—broad or narrow?  Percentage of Income Spent

18  Total revenue – the amount of $$$ a company receives for selling its goods  (price X quantity sold)  Elastic Demand – buyers will noticeably change their buying habits based on price changes  total revenue and prices move in opposite directions As the price falls Total Revenue rises Total Revenue falls As the price rises

19  Inelastic Demand – buyers either only slightly or do not change their purchasing habits based on price changes  Total revenue and prices move in the same direction As the price falls Total Revenue falls As the price rises Total Revenue rises


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