us has free enterprise economy – to make profit – consumers serve own interest by purchasing...
TRANSCRIPT
CH. 4: DEMAND
SEC. 1: WHAT IS DEMAND?
THE LAWS OF DEMAND
US has free enterprise economy – To make profit – consumers serve own interest by
purchasing best product at lowest possible price
forces of supply and demand establish price that serves both
demand – may want different things (cruise, house) – but
may not be able to afford then have no actual demand
may want newest CD at $12-$15 – you can afford
then you have a demand for them price is one major factor that influences
demand
Law of demand – Quantity demanded and price have an
inverse, or opposite relationship
EXAMPLE: PRICE AND DEMAND
Cheryl likes DVD movies, has a job – some extra money to spend wants a $69.95 Star Wars
movie Trilogy – has money but out of stock
decides to buy others, but number will depend on price – wants to save half of for the trilogy to purchase next week
Law of demand is a description of how consumers behave
DEMAND SCHEDULES
Demand schedule – shows law of demand in chart form
Market demand schedule –
EXAMPLE: INDIVIDUAL DEMAND SCHEDULE
2 column table that follows a predictable format left hand column list
various prices of goods or services
right hand column shows the quantity demanded of the goods or services at each price
Figure 4.2 shows Cheryl’s demand for DVD’s
Price per DVD
Quantity Demanded
30 0
25 1
20 2
15 3
10 4
5 7
EXAMPLE: MARKET DEMAND SCHEDULE
Figure 4.2 shows how many DVD’s Cheryl is willing and able to buy at each price in the market
Shows that quantity of DVD’s that Cheryl demands rises and falls according to price
Price per DVD
Quantity Demanded
30 50
25 75
20 100
15 125
10 175
5 300
Business owners need more information than about 1 consumer
Need a market demand schedule – similar to individual
demand schedule except quantities are much larger
also shows market demand depends on price
Price per DVD
Quantity Demande
d
30 50
25 75
20 100
15 125
10 175
5 300
HOW TO CREATE MARKET DEMAND SCHEDULE
Survey customers asking how many DVD’s they would buy at different prices review sales figures
to see how many DVD’s sold at each price
these techniques –
DEMAND CURVES
Demand curve – displays data from an individual demand
schedule Market demand curve –
shows the quantity that all consumers or market as a whole are willing and able to buy at each price
shows the sum of the information on the individual demand curve of all consumers in a market
EXAMPLE: INDIVIDUAL DEMAND CURVE
When prices go up, the quantity demanded goes down
When prices go down, the quantity demanded goes up
Created using the assumption that all other economic factors except price remain the same 0 1 2 3 4 5 6 7
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Price
Price
EXAMPLE: MARKET DEMAND CURVE
Figure 4.5 shows the quantity demanded at different prices shows inverse relationship
between price and quantity demanded
price goes down, quantity demanded goes up
price goes up, quantity demanded goes down
Curve constructed on the assumption that all other economic factors remain constant – only price changes 50 75 100125175300
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Price
Price
ECONOMIC PACESETTERS: VERA WANG: DESIGNER IN DEMAND
B. – June 27, 1949 In fashion industry 15 years when planning her
own weddingcould not find a dress fashionable enough for herself Year following her wedding – decided to fill this need
– make designer wedding dresses Celebrities were choosing her dresses – and demand
grew other designers began to create similar dresses
Her style then spread to other products – ready to wear dresses, perfume, accessories
SEC. 2: WHAT FACTORS AFFECT DEMAND?
MORE ABOUT DEMAND CURVES
Shape of demand curve – why? Law of diminishing marginal utility –
Utility is the satisfaction gained from the use of a good or service
glass of lemonade – 2nd and 3rd glass less satisfying then the 1st
Consumers do not want to pay as much for additional purchases – consumers will buy more glasses of lemonade
if the price is lower for each addition
Income effect – if you buy a $7 book rather than a $15 book – you
feel $8 richer – so may buy another book – also works vice versa
Substitution effect – is the pattern of behavior that occurs when consumers react to a change in the price of a good or service by buying a substitute product – one whose price has not changed and that offers a better relative value if paperback books go above $10, consumers might
buy fewer book and more $4 mags
CHANGE IN QUANTITY DEMANDED
Change in quantity demanded – each change in
quantity demanded is shown by a new point of the demand curve
a change in quantity demanded does not shift the demand curve itself
0 1 2 3 4 5 6 70
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Price
Price
EXAMPLE: CHANGES ALONG A DEMAND CURVE
Figure 4.7 – follow changes on the demand curve shows the change for
one person a market demand
curve provides similar info for an entire market
have larger quantities demanded and larger changes to quantity demanded
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Price
Price
CHANGE IN DEMAND
If people lose job – people more likely to spend limited funds on food and housing than on entertainment – market demand then drops
Change in demand – also called a shift in demand – shifts the position of
the demand curve 6 factors can cause a change in demand:
income, market size, consumer expectations, consumer taste, substitute goods, and complementary goods
DECREASE INCREASE
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D1D2
0 1 2 3 4 5 6 70
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D1D3
FACTOR 1: INCOME
If income changes – person’s ability to buy goods and services changes market demand curve affected as well income of consumers rise or fall – total
demand in the market usually rise or fall market demand curve will shift to the left
or the right normal goods – inferior goods –
Tyler and baseball cards – works at garden center
In fall, works less hours – smaller paycheck – less money to spend – demands fewer bb cards at every price
Promoted – raise of $2 an hour – more money to spend – demand for bb cards increases – demand curve shifts to the right Tyler bought clothes at a
discount store before his raise – now he spends more
discount clothing – inferior goods (used books, generic food products)
FACTOR 2:
Number of consumers ↑or ↓, then market size changes
Tourists come to Montclair (beach town) in summer, population ↑, demand for pizza will increase population shifts change the size of markets ex. – Northeast US – lost population in the last 30 years why shift – better climate, high-tech jobs, less congested
area shift to the West and South – increase in those market sizes
Has altered demand from essentials to nonessentials
FACTOR 3: CONSUMER TASTES
Today’s hot trends become tomorrow’s castoffs good with high popularity – product loses popularity –
Advertising has a strong influence on consumer tastes sellers advertise to create a demand for a
product some will give up perfectly good clothes because
they are convinced the style has changed
FACTOR 4:
Your expectations for the future can affect your buying habits today if you think the price of a good or service
will change – can affect if you buy now or later
ex. – people usually wait until end of summer to buy a car – expect sales
demand is higher in Aug., expect sales and people wait until then
FACTOR 5: SUBSTITUTES
Substitutes – Products are interchangeable – if price of a
substitute drops, people will choose to buy it instead of the original demand for substitute ↑, demand for original ↓
People turn to substitutes if price for original becomes too high demand for substitute ↑, demand for original ↓
Substitutes can be used in place of each other ex. – car, bus, train – if price on one to high, use
another
FACTOR 6: COMPLEMENTS
Complements – increase in demand of one will increase the
demand for the other & vice versa products work in tandem with each other
ex. – CD & CD players if price for one product changes, demand
for both will change the exact same way if prices rises - demand will drop if price drops – demand will rise
SEC. 3: WHAT IS ELASTICITY OF DEMAND?
ELASTICITY OF DEMAND
Consumer demand is dependent on price – but price is seldom fixed If prices rise consumers buy less & if prices drop
consumers buy more – not always the case Changes in consumer buying habits are tied to
type of goods and services being produced and how important the good or service is to the consumer not all increases in price result in a decrease in
demand Elasticity of demand –
Elastic – the more responsive to change – the more likely the
demand is elastic elastic goods are price sensitive
Inelastic – case of inelastic demand – changes in price have little
impact on the quantity demanded A rubber band
when quantity demanded increases – demand is elastic and rubber band stretches
if quantity barely changes, demand is inelastic and rubber band stretches very little
EXAMPLE: ELASTICITY OF DEMAND FOR GOODS AND SERVICES
PDA’s go on sale price down 20%, quantity
demanded goes up 30% - demand is elastic
% change in quantity demanded is greater than the % change in price
goods that have a large # of subs fall into the elastic category, since if prices changes, consumers can get another product
EXAMPLE: ELASTICITY OF DEMAND FOR GOODS AND SERVICES
Insulin – required by diabetics if price rose – they
still need the same amount as before
if price fell – result –
Elasticity of demand for certain products may change – can happen vice versa if there are more
subs – demand may become more elastic
ex. – ex. – vice versa –
CURVE FOR ELASTIC AND INELASTIC DEMAND CURVES LOOK VERY DIFFERENT
Figures 4.13 & 4.14 Inelastic curve more steep – changes along
the vertical axis are proportionally greater than the changes along the horizontal axis
Unit elastic – demand is said to be this when % change in
price and quantity are the same 10% increase in price= a 10% drop in quantity
demanded
ELASTIC INELASTIC
0 4 8 12 16 200
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Price
Price
0 23 30 40 80 120
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Price
Price
The factors that determine elasticity are: availability of substitute goods or services, the proportion of income that is spent on the good or service, and whether the good or service is a necessity or a luxury
WHAT DETERMINES ELASTICITY?
FACTOR 1: SUBSTITUTE GOODS OR SERVICES
Generally - if there are no substitutes for a good or service, demand for it tends to be inelastic ex. – if there are many
substitutes available – demands tends to be elastic
ex. –
FACTOR 2: PROPORTION OF INCOME
The % you spend on a good or service affects elasticity hobby – photography –
Demand for products that cost little of your income tend to be inelastic ex. –If level of income
increases – you are likely to increase your demand for some goods or services
FACTOR 3: NECESSITIES VERSUS LUXURIES
Necessity is something you need: food or water – demand tends to be inelastic even if prices rise – consumers may not buy the
same quantity no matter what the price
price of milk rises – sub with cheaper milk or powdered milk
Quantity demand will change as the law of demand predicts – demand for luxuries tends to
be elastic something you desire, but not
essential the change in quantity
demanded is much greater than the change in price
CALCULATING ELASTICITY OF DEMAND
Businesses figure the elasticity of demand to help them decide whether to make price cuts if demand is elastic – if demand is inelastic –
To determine elasticity look at whether the % change in quantity
demanded is greater than the % change in price
MATH FORMULAS – FIGURE 4.16
Step 1: Calculate % change in quantity demanded.
Step 2: Calculate % change in price.
Step 3: Calculate elasticity
Step 4: If final # is greater than 1, demand is elastic, if less than 1, is inelastic
TOTAL REVENUE TEST
Total revenue – can measure elasticity by
comparing the total revenue a business would receive when offering its products at various prices
if total revenue ↑after the price ↓, then demand is elastic
why? Seller makes less, but still sells enough to make up for lower price if total revenue ↓after the price
↓, demand is inelastic a price decrease showed
modest increase in quantity sold, but not enough to compensate for lower revenue
Formula P= Q=
Total Revenue=P x Q
EXAMPLE: REVENUE TABLE
Figure 4.17 – figure out whether demand is elastic or inelastic
Answer:
Price of Tickets
Quantity Demanded per month
Total Revenue($)
12 1,000 12,000
10 2,000 20,000
8 6,000 48,000
6 12,000 72,000
4 20,000 80,000