ch. 4 demand. what is the law of demand? as prices go down quantity demanded goes up
TRANSCRIPT
CH. 4
Demand
What Is the Law of Demand?
As Prices go down
quantity demanded goes up
Law of Demand (cont.)
As prices go up
quantity demanded goes down
Quantity Demanded
The amount of a good or service that will be purchased at a specific price
Quantity demanded (Qd) – is just a point on the curve
Only price can change the Qd
Demand Schedules
Individual Demand Schedule
Price of a slice of pizza
Quantity demanded per day
Market Demand Schedule
Price of a slice of pizza
Quantity demanded per day
$.50$1.00$1.50$2.00$2.50$3.00
543210
$.50$1.00$1.50$2.00$2.50$3.00
30025020015010050
The Demand Schedule
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50
0
0 50 100 150 200 250 300 350Slices of pizza per day
Pri
ce p
er
slic
e (
in
doll
ars
)
Demand
The Demand Curve
When reading a demand curve, assume all outside factors, such as income, are held constant.
Shifts in Demand
Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.”
When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.
What Causes a Shift in Demand?
Several factors can lead to a change in demand:
1. Income – Normal Goods & Inferior Goods
2. Population or the number of consumers
3. Consumer expectations
Cont.
4. Consumer tastes & advertising
5. Prices of Related goods Price of a substitutePrice of a complement
What Is Elasticity of Demand?
Elasticity of demand is a measure of how consumers react to a change in price.
Inelastic
Demand for a good that consumers will continue to buy despite a price increase
Consumers are not very sensitive to an increase in price
Elastic
Demand for a good that is very sensitive to changes in price
A small change in price leads to relatively large change in the Qd
Calculating Elasticity
Elasticity = percentage change in in quantity demanded/ percentage change in price
Or E= % change in Qd/ % change in P
Percentage change = original number – new number/ original number x 100
Values of Elasticity
Elasticity is< 1 = inelasticElasticity is > 1 = elasticElasticity is “0” = unitary
Factors Affecting Elasticity
1. Availability of Substitutes2. Relative importance3. Necessities vs. Luxuries4. Change over time