CH 4 The Law of Demand

1. CH 4 The Law of Demand Define the law of demand Substitutions Analyze the demand curve

2. $ Sales Sales $ Law of Demand • When a good’s price is lower, consumers will buy more • When a good’s price is higher, consumers will buy less

3. Limited amount of $, prices help influence what we spend our $ on • As prices go up, fewer and fewer people would be willing to pay for certain goods • Law of Demand is based on 2 different patterns • Substitution effect • Income effect

4. Substitution Effect • As the price of a good goes up, consumers become more likely to buy other goods • Causes the amount of that good demanded to go down • When a consumer reacts to a price increase by consuming less of that good and more of others

5. Income effect • When prices go up, our $ does not go as far as it used to • Feels like you don’t have as much $ • Consumption is measured by how much is bought, not how much it costs to buy a good • Consumers may be spending more $ on a good, but the consumption is going down • Opposite is also true • Prices go down, $ for more things

6. Demand Schedule • Demand - must be willing and able to buy a good at a specific price • Demand Schedule - lists the quantity of a good a person would be willing to buy at a different prices

7. Quantity Demanded Price Quantity Demanded Price 300 0.50 5 0.50 1.00 1.00 250 4 1.50 1.50 200 3 2.00 2 2.00 150 2.50 1 2.50 100 3.00 0 3.00 50 Demand Schedule Market Individual

8. Quantity Demanded Price Quantity Demanded Price 300 0.50 5 0.50 3.00 1.00 1.00 250 4 $ Demand Curve 1.50 1.50 200 3 2.00 2.00 2 150 2.50 1 2.50 100 0.00 3.00 0 3.00 50 0 Quantity demanded 5 The Demand Curve • Demand curve - Graphic representation of a demand schedule Individual Demand curve

9. 3.00 $ Demand Curve 0.00 0 Quantity demanded 5 Demand curve • Slopes down and to the right Can be used to predict how buying habits will change with price change Only good for a Very specific set Of market conditions

10. CH 4.2Shifts in the Demand Curve • Difference between a change in quantity demanded and shift in curve • Factors that would shift the curve • How can the change in price of one good affect demand for a related good

11. Shifts in the Demand Curve • Things can affect the demand of a good all the time • To account for this Economists use the term ceteris paribus – “all other things constant” to show how only the price will change the quantity demanded

12. 3.00 $ Demand Curve 0.00 0 Quantity demanded 5 Moving along the Demand Curve When we hold all Other factors the Same, the shift Is along the Demand Curve Price increase will Result in less demanded Price decrease Will result in more demanded

13. Shifting the demand curve • Drop ceteris paribus and allow other things to affect the curve • Now the entire curve shifts 3.00 $ 3.00 3.00 $ $ 0.00 0 Quantity demanded 5 More demanded 0.00 0.00 0 Quantity demanded 5 0 Quantity demanded 5 Less demanded

14. What causes the shift • Income • Normal goods - goods that are demanded more when income increases • Inferior goods - increase in income causes demand for this good to decrease • With more $ available, these are goods you would buy less of, or be less likely to buy

15. Customer Expectations • Price fluctuations • Demand and Price • Price going to rise, current demand goes up • Buy the good sooner • Price going to fall, current demand drops • Wait to buy the good • Population • Growing population needs more goods • Increase in demand • Baby boomers • Now we need more nurses, doctors, nursing homes, houses in Florida and other retirement communities

16. Consumer Tastes and Advertising • Fads • TV, Music, social trends • Advertising • Companies spend millions on advertising each year to get new customers and maintain old ones

17. Related Goods • The demand for one good can affect the demand for another • Complements- Two goods that are bought and used together • Substitute - Goods used in place of other

18. 4.3 Elasticity of Demand • A measure of how consumers react to price changes • What goods would you find money for no matter how much they cost? • Gas, groceries, rent, prescription meds • If the price of something were to rise just a little, would you buy less or none? • Lotto tickets, jewelry

19. Elastic vs Inelastic • Goods that you keep buying regardless • Inelastic • Gas, prescription meds • Goods that you buy less of even if there is a small change • Elastic • Lotto tickets, jewelry, magazines

20. Original # - New # ________________ Original # 100 % change= X Calculating Elasticity % change in quantity demanded __________________________ % change in price ELASTICITY = Greater than 1 = Elastic = 1, Unitary Elastic Less than 1 (not negative!) = Inelastic

21. 4-3 4 X 100 = 25 P 7 10 - 20 10 D X 100 = 100 6 5 4 3 2 1 0 5 10 15 20 25 30 100 25 = 4.0 Elastic p. 92

22. Factors affecting Elasticity • Availability of substitutes • If less subs are available, less likely to change demand • If more subs are available, more potential to alter quantity demanded • Relative importance • Depending how important a good is to you • Are you willing to spend more of your income on a good even if there is a price increase • More drastic an increase, more adjustments need to be made

23. Necessities vs. Luxuries • Something that will always be purchased regardless of a price increase • Milk vs steak • Time • People need time to adjust their buying habits • Short term - inelastic • Long term - elastic

24. Elasticity and Revenue • Change in price will affect how much money a firm makes • Total Revenue - Amount of money a firm makes by selling its goods and services • Based on price and quantity sold

25. Pricing and Elasticity • If a business owner knows if the demand is elastic: • Raising prices will reduce total revenue • Inelastic: • Raising prices will increase total revenue

26. Price Quantity Demanded 300 0.50 1.00 250 1.50 200 2.00 150 2.50 100 3.00 50 • If a business raises its prices too much, it could reduce its total revenue 150 250 300 300 250 Elastic 150 Available of substitutes will Prevent people from buying the good