1 / 40

CHAPTER 4

CHAPTER 4. DEMAND. Defining Demand. Market : exchange between buyers and sellers of goods and services. Supply : the amount of goods and services that sellers are willing to sell at various prices at particular times.

amena-ayala
Download Presentation

CHAPTER 4

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 4 DEMAND

  2. Defining Demand • Market : exchange between buyers and sellers of goods and services. • Supply : the amount of goods and services that sellers are willing to sell at various prices at particular times. • Demand : the amount of goods and services consumers are willing to buy at various prices at particular times.

  3. LAW OF DEMAND • If all other things are constant, the higher the price of a product or service, the less of it people are willing to buy .

  4. Law of Demand Therefore if the price of a good goes up then the Quantity demanded goes down holding other things constant!!!

  5. Quantity demanded (Qd) • amount of good or service • unit of measure • per unit of time • “2 bottles of water per day”

  6. Why Demand rises & falls ? Real Income Effect • What people can actually buy • higher price makes you feel poorer • value of income based on prices Substitution Effect -higher price on one good will cause a replacement with similar goods.

  7. Demand describe in 2 ways: • Demand schedule • The relationship between the Quantity demanded at each price • Demand curve • a graph of demand schedule • Example: bottles of water per day

  8. Demand Schedule Price = $/bottle P Qd $2.00 0 $1.50 1 Qd = bottles/day $1.00 2 $.50 3

  9. D Demand curve P 2 1.5 1 .5 Qd 0 1 2 3 4

  10. Individual Demand • demand curve for 1 buyer • Market Demand** • Sum of all individual buyers • Add up individual Qd for each price

  11. Changes in Demand • recall our assumption • hold other things constant • allow only price to change • but what if other factors do change? • change in demand • shift to a new demand curve

  12. Causes of shifts in demand • Average income • Population • Complements • Substitutes • Personal Preferences • Special Influences • Future Expectations

  13. Increase in demand • increase in Qd at every price • demand curve shifts to the right

  14. D’ D P 2 1.5 1 .5 Qd 0 1 2 3 4

  15. Decrease in demand • decrease in Qd at every price • demand curve shifts to the left

  16. D D’’ P Qd

  17. Normal Goods an increase in income will increase demand • Examples: Ipods, bottled water

  18. Inferior Goods an increase in income will decrease the demand • examples: Ramen noodles, Dollar store

  19. Prices of related goods • What are related goods? • substitutes e.g. Snapple, Coke • complements goods consumed with soft drinks e.g. chips, popcorn

  20. Substitutes If price of Snapple rises, • people switch to water • increase in demand for water If price of Snapple falls, • people switch from water to Snapple • decrease in demand for water

  21. $ price Complements If price of chips rises • eat fewer chips, so consume less soft drinks • demand for soft drinks falls DEMAND

  22. Preferences • what we want to buy? • Change in our likes/dislikes • Skinny jeans? • Tattoos? • Change in technology • Flash drives? • Ipods?

  23. Important!! • Change in demand -- occurs when other factors change -- shift to a new demand curve • Change in demand • NOT caused by change in price of the good

  24. P D D Qd Change in Demand

  25. Change in quantity demanded -- occurs when prices change -- movement along existing demand curve

  26. P D Qd Change in Qd

  27. Law of Diminishing Marginal Utility Diminishing : shrinking, growing smaller Utility : usefulness, amount of satisfaction Marginal utility : extra usefulness you get from using more of a product or service • As people use more of a product or service, the satisfaction they get from their additional purchases declines.

  28. Elasticity of Demand

  29. Elastic Vs. Inelastic Large change Small or No change

  30. Elastic More substitutes Large % of real income High competition Inelastic Few substitutes Small % of real income Low competition Effects of Elasticity

  31. % Change in quantity demanded % Q Price Elasticityof demand % P % Change in Price Elasticity of Demand • Price elasticity reveals the responsiveness of the amount purchased to a change in price. = = - or put simply -

  32. Price Price Price Mythicaldemandcurve • Perfectly inelastic: Despite an increase in price, consumers still purchase the same amount. In fact, the substitution and income effects prevent this from happening in the real world. Quantity/time Quantity/time Quantity/time Demandfor Cigarettes (a) • Relatively inelastic: A percent increase in price results in a smaller % reduction in sales. The demand for cigarettes has been estimated to be highly inelastic. (b) Demand curve of unitary elasticity • Unitary elasticity: The % change in quantity demanded is equal to the % change in price. A curve of decreasing slope results. Sales revenue (price times quantity sold) is constant. (c) Elasticity of Demand

  33. Price Price • Relatively elastic: A percent increase in price leads to a larger % reduction in purchases. When good substitutes are available for a product (as is the case for apples), the amount purchased will be highly sensitive to a change in price. Quantity/time Quantity/time (d) Demandfor Apples • Perfectly elastic: Consumers will buy all of Farmer Jones’s wheat at the market price, but none will be sold above the market price. Demand for Farmer Jones’s wheat (e) Elasticity of Demand

  34. Recall - = Elasticity (– ) 0.14 ( - ) 0.14 = D Elasticity of Demand (110 - 100) (110 + 100) Price($) ($1 - $2) ($1 + $2) • With this straight-line (constant-slope) demand curve, demand varies across a range of prices. • Using the equation for elasticity from before, the formula for arc elasticity shows that, when price rises from $1 to $2 . . . and quantity demanded falls from 110 to 100 . . . the elasticity for that region of the demand curve is ( - .14 ) (inelastic). 2 1 100 110 QuantityDemanded /Time

  35. Recall - = Elasticity (– ) 7.0 ( - ) 7.0 = D Elasticity of Demand (20 - 10) (20 + 10) Price($) ($10 - $11) ($10 + $11) • A price increase of the same magnitude (but a smaller %) from $10 to $11 . . . 11 leads to a decline in quantity demanded from 20 to 10. Even though the change in price here was smaller than before (as a %) the same change in quantity demanded occurred. 10 • Using the same equation to calculate elasticity as before, the elasticity amounts to - 7.0 (greater than - .14 from before). • Thus the price-elasticity of a straight-line demand curve increases as price rises. 10 20 QuantityDemanded /Time

  36. Determinants of Price Elasticity of Demand • When good substitutes for a product are available, a rise in price induces many consumers to switch to other products causing demand to be elastic. • Share of total budget expended on product • As the share of the total budget expended on the product rises, demand is more elastic. • Availability of substitutes

  37. Elastic and Inelastic Demand Price Price $1.50 $1.50 $1.00 $1.00 D D 25 100 90 100 (a) Ballpoint pens per week (in thousands) (b) Cigarette packs per week (in millions) • As the price of ballpoint pens (a) rises from $1.00 to $1.50 (a 50% increase in price). . . quantity demanded plunges from 100,000 to 25,000 (a 75% decrease in quantity demanded). • The % reduction in quantity demanded is larger than the % increase in price, thus the demandfor ballpoint pens is elastic. • As the price of cigarettes (b) rises from $1.00 to $1.50 (a 50% increase in price). . . quantity demanded plunges from 100 mil. to 90 mil. (a 10% decrease in quantity demanded). • The % reduction in quantity demanded is smaller than the % increase in price, thus the demandfor cigarettes is inelastic.

  38. Time and Demand Elasticity • If the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run. • Thus, the demand for most products will be more elastic in the long run than in the short run. • This relationship is often referred to as thesecond law of demand.

  39. Elasticity of Demand APPROXIMATELY UNITARY ELASTICITY INELASTIC Movies 0.9 Salt 0.1 Housing, owner occupied (long run) 1.2 Matches 0.1 Shellfish (consumed at home) 0.9 Oysters (consumed at home) 1.1 Toothpicks 0.1 Private education 1.1 Airline travel (short run) 0.1 Tires (short run 0.9 Gasoline (short run) 0.2 Tires (long run) 1.2 Gasoline (long run) 0.7 Radio and television receivers 1.2 Residential natural gas (short run) 0.1 Residential natural gas (long run) 0.5 Coffee 0.25 Fish (cod), consumed at home 0.5 ELASTIC Tobacco products (short run) 0.45 Restaurant meals 2.3 Legal services (short run) 0.4 Foreign travel (long run) 4.0 Physician services 0.6 Airline travel (long run) 2.4 Taxi (short run) 0.6 Fresh green peas 2.8 Automobiles (long run) 0.2 Automobiles (short run 1.2–1.5 Chevrolet automobiles 4.0 Fresh tomatoes 4.6 • Can you explain why the demand for some goods is highly inelastic while that for others is elastic.

  40. Make a list of 5 items you buy regularly. Think of any substitutes and complements for the items. Decide whether they are elastic or inelastic. Explain why.

More Related