What Is the Law of Demand?

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What Is the Law of Demand?
The law of demand states that consumers buy more
of a good when its price decreases and less
when its price increases.

• The law of demand is the result of two separate
  behavior patterns that overlap, the substitution
  effect and the income effect.
• These two effects describe different ways that a
  consumer can change his or her spending patterns
  for other goods.

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• 3 economic concepts help explain the law of
  demand
• 1.Income effect- an increase or decrease in
  consumer purchasing power caused by a change in
  price.
• Purchasing Power- the amount of income that
  people have to spend on goods and services.
• 2. Substitution Effect- consumers tendency to
  substitute a lower price good for a similar 1
  that is priced higher.
• 3. Diminishing marginal utility- the usefulness
  of each unit consumed decreases with each
  additional unit.

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The Demand Schedule

• A demand schedule is a table that lists the
  quantity of a good a person will buy at each
  different price.

• A market demand schedule is a table that lists
  the quantity of a good all consumers in a market
  will buy at each different price.

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The Demand Curve

• A demand curve is a graphical representation of a
  demand schedule.
• When reading a demand curve, assume all outside
  factors, such as income, are held constant.

Demand
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Shifts in Demand

• The Law of Demand only works assuming all other
  things are held constant.
• When this assumption is dropped, movement no
  longer occurs along the demand curve. Rather, the
  entire demand curve shifts.

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Ch. 4 Section 2- Shifts of the Demand Curve

• Determinants of demand Factors other than price
  that influence the amount of demand for a good or
  service.
• Shifts the curve to the right (increase) or the
  left (decrease).

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What Causes a Shift in Demand?

• Several factors can lead to a change in demand

1. Income Changes in consumers incomes affect
demand. A normal good is a good that consumers
demand more of when their incomes increase. An
inferior good is a good that consumers demand
less of when their income increases. 2. Consumer
Expectations Whether or not we expect a good to
increase or decrease in price in the future
greatly affects our demand for that good
today. 3. Population Changes in the size of the
population also affects the demand for most
products. 4. Consumer Tastes and
Advertising Advertising plays an important role
in many trends and therefore influences demand.
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Prices of Related Goods
The demand curve for one good can be affected by
a change in the demand for another good.

• Complements are two goods that are bought and
  used together.
• Example skis and ski boots

• Substitutes are goods used in place of one
  another.
• Example skis and snowboards

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Product 1 Product 2 Substitute or Complement
Pepsi Coke
2. Hamburger Ketchup
3. Hamburger Bean Burrito
4. Computer Flash Drive
5. Pencil Notebook Paper
6. DVDs Video Tapes
7. Headphones IPod
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Product 1 Product 2 Substitute or Complement
Pepsi Coke Substitute
2. Hamburger Ketchup Complement
3. Hamburger Bean Burrito Substitute
4. Computer Flash Drive Complement
5. Pencil Notebook Paper Complement
6. DVDs Video Tapes Substitute
7. Headphones IPod Complement
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Fill in the answers to the following questions
with (increase/decrease) or (complement/
substitutes.

• Exp. The price of Big Macs increases causing a
  decrease in the Big Mac market. Therefore, the
  demand for Mc Fries decreases because the two
  items are complements.

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1. The cost of Honda Accords decreases, causing
   ________ in the Honda market. Therefore, the
   demand for the Toyota Camry (assume they have
   about the same value) __________ because the two
   items are______________.
2. The cost of automobile maintenance increases,
   causing__________ in the maintenance field.
   Therefore, the demand for public transportation
   _______because it is____________.

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1. The cost of Honda Accords decreases, causing
   increase in the Honda market. Therefore, the
   demand for the Toyota Camry (assume they have
   about the same value) decreases because the two
   items are _substitutes__.
2. The cost of automobile maintenance increases,
   causing _decrease_ in the maintenance field.
   Therefore, the demand for public transportation
   increases_ because it is _a substitute_.

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• 3. The price of movie theater tickets increases,
  causing ________ in the movie ticket market.
  Therefore, the demand for movie rentals_________
  because the two items are _____________.
• 4. The price of CD players decreases, causing
  ____________ in the CD player market. Therefore,
  the demand for CDs __________ because they are
  ______________.

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• 3. The price of movie theater tickets increases,
  causing decrease in the movie ticket market.
  Therefore, the demand for movie rentals increases
  because the two items are substitutes.
• 4. The price of CD players decreases, causing
  __an increase_ in the CD player market.
  Therefore, the demand for CDs _increases__
  because they are __complements.

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Which way would a demand curve shift in the
following scenarios?Write left or right and
which determinant of demand caused the shift.

• 1. Papa Johns Pizza is offering 1 pizzas for
  students on Monday nights.
• 2. The government releases a report that Taco
  Bells meat is actually dog food.
• 3. Susans job at Six Flags ends in late October.
• 4. John has taken a second job.
• 5. Abercrombie opened a new store dedicated to
  pre-teens.
• 6. The local Pepsi plant has an explosion and has
  to close, what happens to the demand for Coke?
• 7. The price of jelly increases 200, what
  happens to the demand for peanut butter?

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DEMAND HEADLINES

• Read the following eight newspaper headlines. In
  each case decide if the event will cause a change
  (shift) in the demand for beef in May. If so,
  determine if it is an increase (right shift) or a
  decrease (left shift) and tell which of the
  determinants of demand has caused the shift
• Prices of related goods
• Income
• Consumer Expectations
• Population
• Consumer Tastes and Advertising
• NOTE 1 Headline will not lead to a shift in
  demand instead it will indicate a change in
  quantity demanded (due to a change in price.)

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• HEADLINE 1 Price of beef to rise in June
  
• Example
• Demand (for beef in May) increases_ because of
  consumer expectations
• 2. HEADLINE 2 Millions of foreign immigrants
  swell the US population
• Demand _________ because _____________
• 3. HEADLINE 3 Pork prices drop
• Demand _____ because ______________

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• 4. HEADLINE 4 Surgeon General warns that eating
  beef can be hazardous to your health
• Demand ________because____________
• 5. HEADLINE 5 Beef prices fall consumers buy
  more
• Demand ______ because _________________
• 6. HEADLINE 6 Real income for Americans drops
  third month in a row
• Demand _____because ___________________

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• 7. HEADLINE 7 Charcoal shortage threatens
  Memorial Day cookouts
• Demand ________ because ____________
• 8. HEADLINE 8 Nationwide fad The super-burger
• Demand ________because __________