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Understanding Law of Demand and its Determinants in Economics

Learn about the Law of Demand, its two effects - Income Effect and Substitution Effect, and the determinants that can shift the demand curve. Explore factors such as consumer tastes, income, market size, future expectations, and price of related goods.

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Understanding Law of Demand and its Determinants in Economics

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  1. Review Law of Demand: Income Effect: Substitution Effect: Diminishing Marginal Utility:

  2. Changes in Demand Demand Shifts: Time allows factors other than price to influence demand significantly. In Economics these factors can shift the entire demand curve of a product to the right or to the left.

  3. Changes in Demand Determinants of Demand — Factors that can cause the entire demand curve to shift to either the right or left. Consumer tastes and preferences Income Market size - # of buyers Future expectations Price of related goods

  4. Determinants of Demand Consumer Tastes and Preferences: Changes in consumer tastes and preferences can affect demand for a product at all possible prices.

  5. Businesses use advertising to influence demand through consumer tastes and preferences. • Bandwagon • Testimonial • Snob Appeal • Wit and Humor • Many more

  6. Determinants of Demand 2. Income—Higher incomes generally allows people to spend more money for goods and services which causes the demand curve to shift to the right. Normal Goods I D Inferior Goods I D

  7. Determinants of Demand 3. Market Size—The size of a market tends to affect demand when markets expand and contract. An increase in the number of buyers leads to an increase in demand for most products. M D

  8. Determinants of Demand Government Policy can affect size of markets China trade policy example Baby Boomers example

  9. Determinants of Demand 4. FutureExpectations—Your expectations for more future income influences your purchases today. Ex. Anticipate a raise in your salary OR If you anticipate being laid off !

  10. 5. Price of Related Goods—A change in a products price can affect demand for related goods and services Complementary Goods—Goods that are commonly used with other goods. P D Substitute Goods – Goods that are used in place of another good P D Determinants of Demand

  11. Determinants of Demand Complimentary Goods Paint / Paintbrushes P D Price of paint increases Demand for paintbrushes (complimentary good) decreases Shifts curve to the left • Substitute Goods • Paint / Wallpaper P D • Price of paint increases – demand for wallpaper (substitute good) increases

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