Demand

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Demand

• Economics Chapter 3

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Demand

• The amount of a good or service that a consumer
  is willing and able to buy at various possible
  prices during a given time period. It is more
  than just the desire to purchase a product.

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• The two important conditions are
• The consumer must be willing and able to buy the
  good or service.
• The demand for the product must be examined for a
  specific time period (day, week, month, year,
  etc.)

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Law of Demand

• States that an increase in a goods price causes
  a decrease in the quantity demanded and a
  decrease in price causes an increase in the
  quantity demanded.

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Example

• You expect to buy an ipod for 200, and you have
  saved that amount. At the store, you discover
  that the price of the ipod has increased from
  200 to 300. Even if you were able to pay the
  higher price, you might not be willing to do so.
  Some other consumers also will be unwilling or
  unable to pay the higher price. In other words,
  the price increase will lead to a decrease in the
  quantity demanded

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• Two economic concepts help explain the Law of
  Demand

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1. Income Effect

• The amount of money, or income, that people have
  available to spend on goods and services is
  called their purchasing power as a consumers
  purchasing power increases, his or her demand for
  goods and services also tends to increase (and
  vice versa)
• Any increase or decrease in consumers purchasing
  power caused by a change in price is called the
  income effect.

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Income EffectExample

• If a store lowers the price of its CDs from 15
  to 10, a consumer can buy more CDs with the same
  amount of money. A person spending 30 can buy 3
  CDs at the new price of 10, but could have
  purchased only 2 CDs at the previous price of
  15. The lower price increases the consumers
  purchasing power and increases the quantity of
  CDs demanded from 2 to 3.

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2. Substitution Effect

• The substitution effect describes the tendency of
  the consumers to substitute a similar,
  lower-priced product for another product that is
  more expensive.

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Substitution EffectExample

• When the price of steak increases, many consumers
  reduce the quantity of beef demanded and buy more
  chicken, a lower-priced substitute.

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• There are 2 ways to show the relationship between
  the price of a good or service and the quantity
  that consumers demand
• Demand Schedule this information lists the
  quantity of goods that consumers are willing and
  able to buy at a series of possible prices.
• Demand Curve plots information, often from a
  demand schedule, on a chart.

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• Because markets do not stand still, demand curves
  will shift to the left (decrease in demand) or
  the right (increase in demand) over a given time
  period.

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Shifts in demand are caused by

1. Consumer taste and preferences
2. Market size
3. Income
4. Prices of related goods or services
5. Consumer expectations