Welcome to Demand

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Welcome to Demand!!!
The Price System How Prices are Determined
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Demand

• Demand is the amount of goods and service that
  consumers are willing and able to purchase at any
  given period of time.
• There is an inverse relationship between price
  and quantity demanded.
• Law of Demand-as price goes up, quantity demanded
  goes down. As price goes down, quantity demanded
  goes up

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Demand Curve

• Shows the inverse relationship between price and
  quantity
• Price goes on the vertical axis, while quantity
  demanded on the horizontal axis.
• Label each demand line with a d1, d2 etc
• Label all parts, product, title, demand curve,
  quantity amount, numbers, arrows

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Demand CurveWidgets
P 50 40 30 20 10 0
d1
10 20 30 40 50 Q Thousands
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Effect on Demand Curve

• The downward slope of the line is caused by 3
  effects
• 1) Income effect-a) Purchasing power is the
  amount of money available to spend on goods and
  services.
• The increase or decrease in purchasing power
  caused by changes in prices is the income
  effect.
• As price goes up, there is less purchasing power
  to buy goods and services.
• As price goes down, there is more purchasing
  power to buy goods and services.

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Effect on Demand Curve

• 2) Substitution effect-the tendency of consumers
  to substitute a lower priced item for a higher
  priced item
• Example if the price of steak increases, people
  will substitute and buy chicken
• Any others?

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Effect on Demand Curve

• Law of diminishing marginal utility
• Utility is defined as the amount of satisfaction
  an individual gets from consuming a product
• As a person consumes more and more of a product,
  their utility goes down, and as utility goes
  down, demand goes down.

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Demand

• Elasticity of Demand The degree to which a
  change in price causes a change in quantity
  demanded.
• There are two types of elasticity inelastic and
  elastic.
• Elasticity will determine the slope of the demand
  curve.

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Inelastic Demand

• Inelastic Demand is when no matter what the
  price, quantity demanded stays relatively the
  same.
• As price goes up a lot, there is very little
  decrease in quantity demanded. Steep slope.
• There are no substitutes for the product and this
  is a necessity.
• Small percentage of consumers income.
• Examples toilet paper, toothpaste.

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Inelastic Demandfor Gasoline
P 9 8 7 6 5 5 3 2 1 0
d1
1 2 3 4 5 6 7 8 9 10 Q Millions
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Elastic Demand

• Defined as A small change in price causes a
  major change in quantity demanded.
• Flat demand curve and with a price increase,
  quantity demanded will go down by a large amount.
• There are substitutes for the product and the
  product is a luxury.
• The percentage of price to income is large.

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Elastic Demand for Cars
P 60 50 40 30 20 10 0
1 0 0 0 s
d1
10 20 30 40 50 60 70 80 90 Q Thousands
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Determinants of Demand

• There are 5 determinants of demand that will
  shift the demand curve the right or left.

• An increase in demand, the curve will shift to
  the
• right or up.

• A decrease in demand, the curve will shift to
  the left
• or down.

• Label the original demand curve- d1 and then
  the
• other curves, d2, d3 etc

• Use arrows to show the direction of the move or
  
• change in demand.

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Change in Quantity Demanded
Demand for T-Shirts
P 20 16 12 8 4 0
A
B
d1
10 20 30 40 50 60 70 Q Thousands
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Increase in Demand
Demand for T-Shirts
P 20 16 12 8 4 0
d2
d1
10 20 30 40 50 60 70 Q Thousand
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Decrease in Demand
Demand for T-Shirts
P 20 16 12 8 4 0
d1
d2
10 20 30 40 50 60 70 Q Thousands
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Determinants of Demand-consumer tastes and
preferences

• If a product is in demand-popular,
• the demand curve will shift to the right
• or increase.

• Example of product with increase-I-pods,
• SUVs, DVDs

• Example of product with decrease-
• Minivans, typewriters, VHS tapes

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Determinants of Demand-size of population

• The larger the population, demand will
• shift to the right or up. Example-Phoenix,
• Arizona

• The smaller the population, demand will
• decrease and shift to the left or down.
• Example-North Dakota

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Determinants of Demand -income

• Income will change and shift the demand curve.
  As people
• make more money, they will spend more money and
  vise
• versa.

• A decrease in demand will shift the demand curve
  to the left
• or down.

• An increase in demand will shift the demand curve
  to the right
• or up.

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Determinants of Demand-expectations of future
income

• If you expect more income or a raise, bonus,
• commissions, you will spend more money. An
  increase
• and demand shifts right and up, increase.
• Example IRS refund, people will spend it before
• they get the money

• If you expect less income, you will spend less
• money and demand will decrease. The curve shifts
  left
• and down

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Determinants of Demand-Price of related goods

• Substitute goods-the tendency of consumers to
  replace higher priced goods with lower priced
  goods-replace steak with chicken, butter with
  butter substitutes

• Complimentary goods-purchase one product with
  another product. Ex-paint and paint brushes