I DEMAND THAT YOU LEARN ABOUT DEMAND!

Economics Marshall High School

Mr. Cline Unit Two BA

• Pencils for Sale:

• How many pencils would you be willing to buy if I sold them for $1.00 each?

• How many pencils would you be willing to purchase at $0.75 each?

• How many pencils would you be willing to purchase at $0.50 each?

• How many pencils would you be willing to purchase at $0.25 each?

• How many pencils would you be willing to purchase at $0.15 each?

• How many pencils would you be willing to purchase at $0.10 each?

• How many pencils would you be willing to purchase at $0.05 each?

• How many pencils would you be willing to purchase at $0.01 each?

* The Law of Demand

• Pencils for Sale: • We can use the answers to these questions to create a demand schedule or

a table that lists the quantity of a good that a person will purchase at each price in a market.

Costs of Each Pencil Purchased # of Pencils Willing to Purchase

$1.00 1

$0.75 2

$0.50 3

$0.25 5

$0.15 8

$0.10 10

$0.05 15

$0.01 25

* The Law of Demand

• Pencils for Sale: • We can use the demand schedule to create a demand curve or the graphic

representation of a demand schedule. Our demand curve would look like this:

* The Law of Demand

• I Demand You Tell Me About Demand! • A Demand Curve can tell us a lot about demand.

• For one, we can see that Demand is the desire to own something, and

the ability to pay for it.

• We can also see the Law of Demand in action, Anyone who has ever spent money can easily understand that the lower the price of an item, the more likely a person will be to buy more of the item.

* The Law of Demand

• I Demand You Tell Me About Demand! • The Law of Demand is not the result of one pattern of behavior, however,

but the convergence of two separate patterns. • The first of these patterns is the Substitution Effect, which is the

change in behavior that takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good. • When the price of pencils rises, pencils become more expensive in

relation to other writing utensils such as mechanical pencils and pens.

• So, as the price of pencils rises, consumers have an incentive to

buy one of those alternatives as a substitute for a pencil. • The substitution effect can also apply to a drop in prices. If the

price of pencils drops, pencils become cheaper to other alternatives. Consumers will now substitute pencils for pens and mechanical pencils, causing the quantity of pencils demanded to rise.

* The Law of Demand

• I Demand You Tell Me About Demand! • The Law of Demand is not the result of one pattern of behavior, however,

but the convergence of two separate patterns. • The second of these patterns is the Income Effect.

• When prices rise, we all feel poorer. When the price of

notebooks, reading materials, or backpacks increases, your limited budget just won’t buy as much as it used to. It feels as if you have less money.

• You can no longer afford to buy the same combination of goods,

and you must cut back your purchases of some goods. If you buy fewer pencils without increasing your purchases of other school supplies, that is the income effect.

• Economists measure consumption in the amount of a good that is

bought, not the amount of money spent to buy it. Although you are spending more on pencils, you are consuming less of them, so your consumption has gone down.

* The Law of Demand

• I Demand You Tell Me About Demand! • The Law of Demand is not the result of one pattern of behavior, however,

but the convergence of two separate patterns. • The second of these patterns is the Income Effect.

• If the price rises from $0.50 a pencil to $1.00 a pencil, you may

certainly decide to purchase the usual number of pencils and pay extra, but you certainly would not choose to purchase more pencils than before.

• Although people spend more of their money on pencils, when the price goes up, the quantity demanded goes down. In this sense, the income effect leads to the law of demand.

• You should know also that the income effect also operates when the price is lowered. If the price of pencils falls to $0.05, you feel wealthier, and as a result you buy more pencils. That is the income effect.

* The Law of Demand

• I Demand You Tell Me About Demand! • The Demand Curve also shows its limits, we can only see what demand will

be at each price along the curve, if all other things are held equal, or what economists use the Latin to describe as ceteris parabis, then the Demand Curve is accurate.

• However, certain changes do affect demand, and in those instances the demand curve shifts either outward or inward, meaning that there is a change in demand, and not just in the quantity demanded.

• So what causes these shifts in demand? • Income: A consumer’s income affects his or her demand for most goods. Most items that we purchase are normal goods, or goods that consumers demand more of when their income increases. In other words, an increase in a consumer’s income from $300.00 a week to $500.00 a week will cause them to buy more of a normal good at every price level.

* The Law of Demand

• I Demand You Tell Me About Demand! • So what causes these shifts in demand?

• Income:

• A consumer’s income affects his or her demand for most

goods. Most items that we purchase are normal goods, or goods that consumers demand more of when their income increases. In other words, an increase in a consumer’s income from $300.00 a week to $500.00 a week will cause them to buy more of a normal good at every price level.

• If we were to draw a new demand schedule for the pencils it would show a greater demand for pencils at every price. Plotting this new schedule would show a shift of the demand curve to the right of the curve indicating an increase in demand.

Costs of Each

Pencil Purchased

# of Pencils

Willing to Purchase

$1.00 4

$0.75 8

$0.50 12

$0.25 20

$0.15 32

$0.10 40

$0.05 60

$0.01 100

* The Law of Demand

• I Demand You Tell Me About Demand! • So what causes these shifts in demand?

• Income:

• Conversely, a decrease in income would cause demand to fall, and

the demand curve to shift to the left. This is called a decrease in demand.

• There are also other goods called inferior goods which are goods that you would buy in smaller quantities, or not at all, if your income were to rise and you could afford something better.

• Inferior goods also cause the demand curve to shift to the left.

* The Law of Demand

• I Demand You Tell Me About Demand! • So what causes these shifts in demand?

• Consumer Expectations:

• Our expectations about the future can affect our demand for

certain goods today.

• Suppose that you have had your eye on a new computer for some time. One day you walk into the store and you find out that there will be a one week sale beginning next week.

• Now that you expect a lower price in the near future, you would be more likely to wait a week to purchase the computer.

• In other words, the expectation of a lower price in the future has caused your immediate demand to be zero, and, when you come into the store next week, your immediate demand will increase because the price will be going back up.

* The Law of Demand

• I Demand You Tell Me About Demand! • So what causes these shifts in demand?

• Consumer Expectations:

• The current demand for a good is positively related to its

expected future price.

• If you expect the price to rise, your current demand will rise, which means you will buy the good sooner.

• If you expect the price to drop, your current demand will fall and you will wait for the lower price

* The Law of Demand

• I Demand You Tell Me About Demand! • So what causes these shifts in demand?

• Population:

• Changes in the size of the population will also affect the demand

for most products.

• For example, a growing population needs to be housed and fed. Therefore, an increase in population will increase demand for houses, food, and many other goods and services.

• Your grandparents, the “Baby Boomer” generation, are a prime example of how population trends can have a particularly strong effect on certain goods.

* The Law of Demand

• I Demand You Tell Me About Demand! • So what causes these shifts in demand?

• Consumer Tastes and Advertising:

• Changes in tastes and preferences cannot be explained by

changes in income or population, or worries about future price increases.

• What is considered “popular,” “fashionable,” or “trendy” are hard things to measure and account for, though consumer preferences do cause shifts in the demand curve.

• Advertising is considered a factor that shifts demand curves because it plays an important role in many trends. Companies spend money on advertising because they hope it will increase the demand for the goods they sell.

* The Law of Demand

• I Demand You Tell Me About Demand! • So what causes these shifts in demand?

• Prices of Related Goods:

• The demand curve of one good can be affected by a change in the

demand for another good. There are two types of goods that interact this way. • Complements are two goods that are bought and used

together, such as hot dogs, and hot dog buns.

• Substitutes are goods used in place of one another, such as hamburgers and hot dogs.

• When demand for a complementary product increases, demand for its complement will also increase. When the price of hot dogs goes down, more people will also purchase hot dog buns.

* The Law of Demand

• I Demand You Tell Me About Demand! • So what causes these shifts in demand?

• Prices of Related Goods:

• When demand for a complementary product increases,

demand for its complement will also increase.

• When the price of hot dogs goes down, more people will also purchase hot dog buns.

• When demand for a substitute product increase, the demand for the product it is substituting for will decrease.

• When the price of hamburger goes down, less people will want hot dogs, and vice versa.