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DEMAND

DEMAND. The various quantities that a person or group is willing to buy at various prices. Law of Demand. As prices increase , the quantity people are willing to buy decreases As prices decrease , the quantity people are willing to buy increases Indirect price/quantity relationship.

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DEMAND

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  1. DEMAND The various quantities that a person or group is willing to buy at various prices

  2. Law of Demand • As prices increase, the quantity people are willing to buy decreases • As pricesdecrease, the quantity people are willing to buy increases • Indirect price/quantity relationship

  3. DEMAND TABLE (Coca-Colas per week) PriceQuantity $.25 20 $.50 10 $.75 7 $1.00 5

  4. Demand Graph

  5. REASONS FOR DEMAND Income Effect (Assumes income is constant) When price rises, a consumer cannot afford to buy as much. But, when price declines, a consumer can afford to buy more. Price changes affect “purchasing power” of income

  6. REASONS FOR DEMAND Substitution Effect When prices increase on one product, consumers will buy a substitute product instead. But when prices decrease on a product, consumers will switch to that product from other substitutes. Substitutes are products that can be used in place of each other. Complements are products that are used together

  7. Cross Elasticities (Ec) Cross elasticity measures the degree of relationship (substitutes or complements) between two related goods (X and Y). %r Qty Demanded of X %r Price of Y If Ec>0 then X and Y are Substitutes If Ec<0 then X and Y are Complements Ec=

  8. REASONS FOR DEMAND Law of Diminishing Marginal Utility As we have more and more units of a product, the satisfaction we get from each additional unit decreases. Marginal = additional, next, or last Utility = satisfaction

  9. Changes in Demand If Demand changes, then people want more or less of the product even when the price remains constant There are several reasons why Demand might change…...

  10. Changes in Demand When people have more money, they buy more of everything, and when they have less, they buy less. A change in people’s income... Normal Goods  Direct Income/Demand relationship Inferior Goods Indirect Income/ Demand relationship

  11. Income Elasticity (Ey) Income elasticity measures the reaction in Demand for a product to changes in Income. %rQty.Demanded %rIncome If Ey>0 then the product is a Normal Good If Ey<0 then the product is an Inferior Good Ey=

  12. Change in Demand People’s tastes and preferences change….. Advertising changes people’s attitudes, desires, etc. Styles change, fads come and go.

  13. Change in Demand Get a new job? You might need different clothes. Move? A baby on the way? A new product get invented? Situation or needs change...

  14. Changes in Demand If we expect the price to go down soon, we will have reduced Demand now, and visa-versa Expectations of future price...

  15. Changes in Demand The prices of substitutes or complements change…. If Chick-Fil-A goes up in price, the Demand for Wendy’s might increase because people will substitute Wendy’s for Chick-Fil-A.

  16. Changes in Demand There’s a change in the number of consumers in the market... When there are more consumers, Demand goes up, and visa-versa

  17. P $4.95 D2 D1 Q 200 150 Increase in Demand

  18. P $1.99 D2 D1 Q 65 40 Decrease in Demand

  19. Summary: • Income, Wealth, Credit • Personal Tastes and Preferences • Situation • Expectation of Future Price • The prices of Complements or Substitutes • Number of Consumers in the Market Demand will change if there are changes in:

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