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Economics

Economics. Ch. 5 Demand and Supply. Class Demand Schedule for …. On your handout…. Create a demand curve using the information in the demand schedule. Why might some students be willing to pay $10 for this product? Why might some students choose not to pay even $1 for this product?

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Economics

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  1. Economics Ch. 5 Demand and Supply

  2. Class Demand Schedule for ….

  3. On your handout…. • Create a demand curve using the information in the demand schedule.

  4. Why might some students be willing to pay $10 for this product? • Why might some students choose not to pay even $1 for this product? • You have created a demand curve for the product. What happens to the quantity demanded for this product when the price goes down? When the price goes up?

  5. Most demand curves look similar to the one you created. Given this, what do you think the “law of demand” might say?

  6. Demand • Defined: Willingness and ability to buy a good or service • There is a difference between Demand and Quantity Demanded • Demand refers to the entire curve – the willingness and ability to buy at each and every price • Quantity Demand refers to the amount demanded at a given price

  7. Class Demand Schedule for ….

  8. Assumptions • Think: “ceteris parabis”. All other things remain constant. • Assume that all goods in a particular market are the same • Demand curves and demand schedules measure how quantity demanded is impacted by changes in price

  9. Market Demand Curve • Sum of all individuals in a market that are willing and able to buy.

  10. Law of Demand • As the price goes down….. • Quantity demanded goes….. • As the price goes up….. • Quantity demanded goes…. Demand Curves show a negative or indirect relationship between price and quantity demanded

  11. Why is the Demand curve downward sloping? • Law of diminishing marginal utility • Utility means satisfaction • Marginal Utility is the extra satisfaction one receives from the consumption of an additional unit.

  12. Why is the Demand curve downward-sloping? • Income effect • Incomes are limited because of scarce resources • Individuals must make decisions about what to buy. • We often make our decisions based on the price of a good

  13. Why is the Demand curve downward-sloping? • Substitution effect • We will substitute one good for another based on the price of these related goods • Example: If the price of coffee rises, I may decide to purchase tea instead.

  14. Which of the following best describes the income effect of a price increase? • The price of corn chips increases, so Michelle buys potato chips • The price of bacon increases, so Michelle buys more sausage • Michelle’s apartment rent increases, so she cancels her subscription to a monthly magazine • Michelle’s apartment rent increases, so she moves to a smaller apartment.

  15. Movement versus Shifts • Movement refers to move along a single demand curve. Move up or down • When the demand curve shifts, quantity demand changes for each and every price. Demand curves shifts left or right • Rightward shift means that demand has increased • Leftward shift means that demand has decreased.

  16. What causes movement? • Changes in price

  17. What causes Shifts? • Many things! • We also call these determinants of demand

  18. Shifters of Demand • Changes in income • Changes in numbers of consumers • Changes in tastes and preferences • Changes in consumer expectations • Changes in the prices of related goods – Subsitutes • Changes in the prices of related goods - Complements

  19. Change in Income • When income rises, demand increases. People buy more at each and every price. • Demand Curve shifts rightward • When income falls, demand decreases. People buy less at each and every price. • Demand Curve shifts leftward

  20. Change in the number of consumers • When income rises, demand increases. People buy more at each and every price. • Demand Curve shifts rightward • When income falls, demand decreases. People buy less at each and every price. • Demand Curve shifts leftward

  21. Change in taste and preferences • When preference for a good rises, demand increases. People buy more at each and every price. • Demand Curve shifts rightward • When preference for a good falls, demand decreases. People buy less at each and every price. • Demand Curve shifts leftward

  22. Change in consumer expectations • When prices are expected to increase later, demand increases. People buy more at each and every price. • Demand Curve shifts rightward • When prices are expected to decrease later, demand decreases. People buy less at each and every price. • Demand Curve shifts leftward

  23. Change in the price of Substitutes • When the price of a substitute rises, demand increases. People buy more at each and every price. • Demand Curve shifts rightward • When the price of a substitute falls, demand decreases. People buy less at each and every price. • Demand Curve shifts leftward

  24. Change in the Price of Complements • When the price of a complementary good lowers, demand increases. People buy more at each and every price. • Demand Curve shifts rightward • When the price of a complementary good increases, demand decreases. People buy less at each and every price. • Demand Curve shifts leftward

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