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Demand

Demand. Demand Schedule. P. Q D. $4/lb. .5 million. $3/lb. 1million. $2/lb. 2 million. Oranges. Law of Demand. As P , Q D (As P , Q D ) There is an inverse relationship between P and Q D NOT As P , D NOT As Q D , P NOT As D , S. Demand Curve. P. $4 $3 $2. D. Q D.

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Demand

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  1. Demand

  2. Demand Schedule P QD $4/lb. .5 million $3/lb. 1million $2/lb. 2 million Oranges

  3. 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

  4. Demand Curve P $4 $3 $2 D QD .5m 1m 2m Oranges

  5. Demand Curve P P2 QD P1 D QD Q2 Q1 Oranges

  6. Shape and Slope of a Demand Curve • Slope • Negative (slopes downward from l-r) • Why? • Law of Demand (inverse relationship between P and Q) • Why true? • Income Effect • Substitution Effect

  7. Shape and Slope of a Demand Curve • Shape • Curved (not a straight line) • Why? • Law of Diminishing Marginal Utility (the ice cream effect)

  8. 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.

  9. 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.

  10. 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

  11. 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

  12. Substitutes P P D P2 QD P1 P1 D1 D D Q Q1 Q2 Q Q2 Q1 Oranges Apples Papples QDapples Doranges QDoranges

  13. 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

  14. Complements P P D P2 QD P1 P1 D D D1 Q Q2 Q1 Q Q2 Q1 Jelly Peanut Butter PPB QDPB DJelly QDJelly

  15. 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

  16. Price Elasticity of Demand P P D D Q Q Gas Movies

  17. 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?

  18. 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

  19. Total Revenue Test Movie Prices Ticket PriceTickets Sold $6.00 x 100 =$600 $8.00 x 80 = $640 (inelastic) $8.00 x 50 = $400 (elastic) $8.00 x 75 = $600 (unit elastic)

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