4-2: What Factors Affect Demand?

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4-2 What Factors Affect Demand?
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Law of Diminishing Marginal Utility

• Definition the marginal benefit of using each
  additional unit of a product during a given
  period of time will decline

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How does this affect the demand curve?

• The demand curve slopes downward because an
  individuals utility, or overall satisfaction,
  decreases as they obtain more of a good or service

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Example of Law of Diminishing Marginal Utility

• On a hot day, the ice cream truck rolls through
  your neighborhood
• You will most likely receive the most
  satisfaction from the first ice cream bar you
  purchase rather than the second, third, or fourth

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Why do consumers demand more goods and services
at lower prices and fewer at higher prices?

• 2 reasons
• 1. Income effect the change in the amount that
  consumers will buy because the purchasing power
  of their income changes

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Cont.

• 2. Substitution effect change in the amount that
  consumers will buy because they buy substitute
  goods instead

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Change in Quantity Demanded

• Definition an increase or decrease in the amount
  demanded because of change in price
• A change in quantity demanded does not shift the
  demand curve

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Change in Demand

• Definition occurs when something prompts
  consumers to buy different amounts at every price
• Change in demand is also called a shift in demand
  because it shifts the position of the demand curve

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Change in Demand Cont.

• Example high unemployment rate can cause
  consumers to buy different quantities of
  goods/services

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6 factors can cause a change in demand

• 1. Income as income increases/decreases it
  affects a persons ability to purchase goods and
  services
• Changes in income also affect the market demand
  curve
• If most consumers incomes in a market go up,
  total demand will increase

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Increased Income Affects 2 Types of Goods

• Normal goods goods that consumers demand more of
  when their income rises
• Example new car

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Inferior Goods

• Definition goods that consumers demand less of
  when their income rises
• Examples used books, off-brands

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6 factors (continued)

• 2. Market size if the number of consumers
  increases or decreases it also affects the market
  size
• Example significant increase in population in
  the Southwest

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6 factors (continued)

• 3. Consumer tastes when a good/service is
  popular consumers demand more of it at all prices
• When the product becomes less popular, consumers
  demand less of it

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6 factors (continued)

• 4. Consumer expectations future expectation can
  affect todays buying habits

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6 factors (continued)

• 5. Substitute goods goods and services that can
  be used in place of each other
• If the price of a substitute good drops, people
  will buy that good and not the original item

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6 factors (continued)

• 6. Complementary goods goods that are used
  together
• An increase in the demand for one good increases
  the demand for the complementary good

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Substitute Goods vs. Complimentary Goods

• 1. List 3 substitutes for pop.
• Water, juice, milk, lemonade, tea, coffee, etc.
• 2. List 3 compliments for hamburgers.
• Fries, lettuce, tomatoes, pickles, etc.

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Questions

• 1. Explain why an increase in income can lead to
  a decrease in demand.
• 2. Name one thing that can affect market size.

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Questions

• 3. The U.S. government has used many strategies
  to reduce smoking. It has banned TV ads for
  cigarettes, run public service messages about the
  health risks of smoking, and has imposed high
  taxes on cigarettes. Which factors that affect
  demand was the government trying to influence?

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Questions

• 4. Do you think changes in consumer taste are
  often initiated by the consumers themselves or by
  manufacturers and advertisers? Explain your
  answer using at least one real-life example.

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Questions

• 5. A popular band has released their latest CD
  and has been given a clothing endorsement.
  Explain how will the demand curve of this
  clothing company be affected.