DemandChapter 4

What is Demand?

The willingness to BUY a product Essential in understanding the market

Determines pricing Quality of goods and services Distribution of goods and services

MICROeconomics= deals with behavior and decision making by individuals and buisnesses.

Demand Schedule/Curve

Law of Demand Demand varies

INVERSELY with its price Price Demand

Price Demand

WHY?

Changes in Quantity Demand Change in quantity purchased due to

change in price Income Effect:

Change in QD due to change in consumer’s income itunes song $2.99 each x 25 =$74.75 itunes song $ .99 each x 25 =$24.75 Difference of $50 consumers has left of income

Change in Quanity Demand Substitution Effect:

Change in QD due to change in the relative price of produce Popcorn vs. Candy at movies

Movie goer only had $6 to spend on refreshments at the movies.

Popcorn $3.50 and candy is $4.00. Movie goer chooses popcorn with some $ left

over to buy a small drink.

Now that you have charted your curve…

How might the QD for tickets change due to the income effect?

Substitution Effect?

Changes in Demand

Changes in Demand Buy different

amounts at same prices Creates new curve_____________________

1. Consumer Income 2. Consumer Trends 3. Price of Related

Products

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=change+in+demand

Consumer Income Change in

consumer income changes demand Ex. Poor economy

Both up or both down

Why?

Income D

Income D

Consumer Income Which curve

represents increase in consumer income? Decrease in consumer income?

How did you determine your asnwers?

Consumer Taste Trends, ads, news

affect consumer taste

Ex. Bell bottom jeans

Both go up or both go down

Why?

Pop D

Pop D

Consumer TastePrice QD Bell

Bottoms 1975

QD Bell Bottoms 2012

$8

$10

$18

$25

$35

Create a graph depicting the shift of demand

Price of Related Products Change in price of

related products changes demand Substitutes

Butter v. margarine

Compliments Pancakes and

syrup

Substitutes Prices goes UP QD goes DOWN Substitute goes UP

Complimentary Price goes UP QD goes DOWN Complimentary Goes

DOWN

Practice Name a product that you recently bought

because it went on sale. Identify at least one substitute for the product and a complimentary if possible. What happened to your demand for the substitute good when you purchased the sale item? What happened to your demand for the complimentary item when you purchased the sale item? Distinguish between a change in quantity demanded and a change in demand.

Marginal Utility The EXTRA usefulness

or satisfaction a person gets from acquiring one more unit of a product. Amount added “at the

margin” 1 cup of hot cocoa after

playing in the snow vs. 2 cups

When you reach saturation you stop buying – your marginal utility is less than then the price is worth

Diminishing Marginal Utility Too much hot cocoa

makes your want it less….your marginal utility is diminishing or going down

The more units a person acquires the less eager they are to buy more

Demand decreases

Homework Find a headline from a current

newspaper (paper or online) that illustrates something that could cause a CHANGE in DEMAND.

Determine what change in demand would occur and why?

Create a general graph showing the shift of the demand curve and write a brief explanation of the reason for the shift.

Demand Elasticity Used to indicate the extent to which

changes in price cause changes in the quantity demanded

Elastic demand = small change in price has large change in QD

Inelastic demand= change in price causes small change in QD

ELASTIC Demand Usually wants and not needs Price increase or decrease

will show noticible change in QD

Example: T-bone steaks Price drop from $6.oo/lbs. to $3.00 will

increase demand

INELASTIC Demand Usually needs When price changes QD remains

constant

Ex. Price of table salt decreases, QD will not really change

QD Price

Specific v. General Market Depending on market size – a product

can be elastic or inelastic

Specific markets= more elastic Local gas station= high gas prices, low QD

General markets= less elastic All gas stations= high gas prices, QD

constant

Elasticity Practice Create your own example of a product

that can be sold in the specific and general markets and explain the affect on demand elasticity.

Determinants of Demand Can the Purchase be Delayed

Medicine vs. Twinkies

Are Adequate Substitutes Available? Chick Fil A Waffle Fries v. McDonald’s French Fries

Does the Purchase Use a Large Portion of Income? New car vs. Mc Donald’s Strawberry Shake