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Demand

Demand. Chapter 3. What is demand?. The willingness and ability to purchase a good or service Demand = Willingness and ability to purchase. The Law of Demand. As a price of a good increases the quantity demanded of the good decreases and vice versa

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Demand

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  1. Demand Chapter 3

  2. What is demand? • The willingness and ability to purchase a good or service • Demand = Willingness and ability to purchase

  3. The Law of Demand • As a price of a good increases the quantity demanded of the good decreases and vice versa • Quantity Demanded – is there a difference between demand and quantity demanded? • A demand for popcorn • Buying the popcorn 2 bags for 1 dollar is quantity demanded

  4. Opposite Directions • Why do price and quantity demanded move in opposite directions? • Law of diminishing marginal utility • Candy experiment • As you obtain less utility from additional units you will only buy large quantities at low prices

  5. Demand Schedule • Law of Demand says… • The up / down relationship is inverse relationship • A chart showing the inverse is a demand schedule

  6. Demand Curve • 3-1 b shows the demand curve • Plotting connected points to show patterns • There are almost always patterns in economics

  7. What happens when said curve shifts? • Demand curves shifting right or left show more or less demand of a product at price • What causes these shifts?

  8. Income • As income goes up, people have the ability to purchase more of a good • This doesn’t necessarily mean they will • Normal Good – income goes up, purchase of that good goes up • Inferior Good – income goes up, purchase of that good goes down • Neutral Good – income goes up, purchase of that good stays the same

  9. Preferences • People prefer certain products • Types of video games

  10. Prices of Related Goods • Substitute Goods • Cars – Coffee / Tea – Video Games • Complements • Things that go together • Balls / Bats • PS2 / Games • Cars / Tires

  11. Number of Buyers • Certain goods are demanded more in certain areas • Surfboards / CA v. SD

  12. Change in Demand v. Change in Quantity Demanded • A change in demand refers to a shift in the curve • Change in quantity demanded = A movement from one point to another point on the same demand curve

  13. Responsibilities of Buyers • Researching • Ethics in paying

  14. Section 3 • Elasticity of Demand • Relationship between percentage change in in quantity demanded and the percentage change in price % Change in quantity demanded Elasticity of demand = ---------------------------------------------------- % Change in price

  15. Demand • Elastic demand – when quantity demanded percentage changes more than the price • Inelastic demand – when quantity demanded percentage changes less than the price • Unit Elastic demand – when quantity demanded and price have similar relationships

  16. Determinants of Elasticity • The number of substitutes has great effects on elasticity • Heart Medicines • Breads

  17. Luxuries v. Necessities • Luxury – don’t need it to survive • Necessity – Food, medicine… • Which goods are elastic?

  18. Percentages of Income • Making budgets on any level, percent of income is studied • Obvious which goods are more responsive to • Relationship to Time • Changing to adapt and adjust over time

  19. What does it matter? • All versions of elasticity matter, because they relate to total revenue

  20. Case 1 • A rise in price does not necessarily mean a rise in revenue Elastic demand + Price rise = TR Decrease

  21. Case 2 • If demand is elastic and price is decreased, revenue will go up • Elastic Demand + Price Decline = TR Increase

  22. Case 3 • Inelastic demand + Price Rise = TR Increase • If demand is inelastic a price rise will lead to a revenue increase

  23. Case 4 • If demand is inelastic and price declines, total revenue will decrease • Inelastic demand + Price decline = TR Decrease

  24. Unit Elastic • Equal forces in opposite directions • No change to total revenue

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