Demand

1. Demand

2. What is Demand? The Law of Demand Demand: the desire for an item and the ability to pay for it Law of demand: when price of good or service goes up, quantity demand goes down and vice versa

3. The Law of Demand • Price & Demand • Law of demand explains consumer behavior as well as economic concept • Cheryl decides to spend money on DVDs • at $15 each, Cheryl demands 3 DVDs • at $5 each, she demands 7 DVDs

4. Demand Schedules • Demand schedule—a table lists how much of an item an individual will buy at each price • Market demand schedule—a table lists how much of an item all consumers will buy at each price

5. Demand Curves • Demand curve—a graph that shows amount of an item a consumer will buy at each price • Market demand curve—amount all consumers will buy at each price

6. What is Elasticity of Demand? Elasticity of Demand • Elasticity of demand measures how responsive consumers are to price changes Elastic—quantity demanded changes greatly as price changes Inelastic—quantity demanded changes little as price changes

7. What Determines Elasticity? • Substitute Goods or Services • If no substitute for a product, demand tends to be inelastic ex. gasoline • If there are substitutes for a product, demand tends to be elastic ex. shoes • Necessity or Luxury • Necessity—something needed for life, demand is inelastic ex. prescription medications • Luxury—something desired but not essential, demand for luxuries tends to be elastic ex. BMW vs. Ford

8. Vera Wang: Designer Responding to Demand • Sophisticated wedding gowns not available for career women • Wang created line of wedding gowns to meet demand • Style became popular; other designers imitated • Wang created more demand for her style by designing other products

9. Reviewing Key Concepts • Explain the differences between the terms in each of these pairs: • demand and law of demand • demand schedule and demand curve • market demand schedule and market demand curve

10. What Factors Affect Demand? • Law of diminishing marginal utility: additional benefit of each additional unit declines as each unit is used • Income effect: amount people buy changes as purchasing power of their income changes • Substitution effect: amount people buy changes as they buy substitute products

11. Change in Quantity Demanded • change in amount consumers buy because of change in price • does not shift the demand curve itself

12. Change in Demand • Change in demand: caused by a change in the marketplace. It prompts people to buy different amounts at every price. Also causes shift in demand curve • When we shift the demand curve, we assume • ceteris paribus: everything else is held constant

13. Change in Income Causes Shift in Demand Curve • As incomes of most consumers in a market change, so does total demand • normal goods—demanded more when consumers’ incomes rise • inferior goods—demanded less when consumers’ incomes rise

14. Change in Population/Market Size Causes a Change in Demand • Demand for most goods changes as market size changes • rise in population leads to increased demand • decrease in population leads to decreased demand

15. Consumer Tastes/Advertising Causes a Change in Demand • Consumer tastes change; products gain and lose popularity • Consumers demand a greater amount of popular items at every price • Sellers advertise to create demand for products

16. Change in Consumer Expectations Cause a Change in Demand • Expectations about future price of items affect individual behavior • expected rise or fall in price can decide whether to buy now or wait • Expectations of all consumers in a market affect demand • Ex. because cars go on sale at end of summer, demand goes up then

17. Change in Price of Related Goods Causes a Change in Demand • Substitutes • products used in place of each other • if price of substitute drops, people buy it instead of original item • if price of original item rises, people will buy substitute • Complements • goods that are used together • -a rise in demand for one increases the demand for the other • -If price of one product changes, demand for both changes in same • way. • -If price of one rises, demand for both will drop

18. Reviewing Key Concepts • Explain the differences between the terms in each of these pairs: • change in quantity demanded and change in demand • income effect and substitution effect • normal goods and inferior goods • substitutes and complements

19. Total Revenue Test • KEY CONCEPTS • Total revenue—amount of money company gets for selling its products • Formula: TOTAL REVENUE = P (price) x Q (quantity sold) • Total revenue test—shows total revenue from item at various prices • if total revenue increases after price drops, demand is elastic • if total revenue decreases after price drops, demand is inelastic

20. Reviewing Key Concepts • Use each of these terms in a sentence that gives an example of the term: • elastic • inelastic • total revenue

21. Case Study: Fueling Automobile Demand • Background • Demand for automobiles and all services connected with them is high • Car dealers want to sustain and increase demand for their product • What’s the Issue • How does demand affect your selection of a vehicle? • Thinking Economically • How would the demand for automobiles be affected by information presented in each of these documents? Support your answer with examples from the documents. • Identify and discuss the factors that affect elasticity of demand illustrated in these documents. • Explain how Documents B and C illustrate a cause and effect relationship in the demand for SUVs. Use evidence from these documents to support your answer.