Demand. Understanding Economics Chapter 4

Transcription

1 Demand Understanding Economics Chapter 4

2 Chapter 4, Lesson 1 WHAT IS DEMAND?

3 What is Demand? Demand describes the various amounts of product that someone is willing and able to buy over a range of possible prices at one point in =me Businesses try to influence demand with adver=sing. Microeconomics branch of economic theory dealing with the behavior and decision making by small units such as individuals and businesses Ceteris paribus all other things held constant When evalua=ng demand we are only concerned with the quan2ty that people would want and be able to buy at different prices. Example: How many people would want to see a movie on a given ajernoon if the price was $5; what if the price was $10? We don t consider if it was a holiday or how many other movies were playing or how easy it is to purchase =ckets.

4 Demand Demand Schedule lis=ng showing the quan=ty demanded at all possible prices See the demand schedule for an individual for burritos Note that consumers are willing and able to buy more of a product as the price decreases. This shows an inverse rela=onship between price and quan=ty demanded.

5 Demand Curve Demand Curve graph showing the quan=ty demanded at every possible price No=ce that demand curves are always downward sloping. The demand curve is formed by ploung the combina=ons of price and quan=ty demanded from a demand schedule. See the demand schedule for an individual for burritos at right.

6 Market Demand Market demand curve demand curve that shows the quan==es demanded by everyone who is willing and able to purchase the product. Add the individual demand curves together by adding the quan==es for each at each price.

7 The Law of Demand Law of Demand rule sta=ng that more will be demanded at lower prices and less at higher prices Note that an inverse rela2onship exists between price and quan=ty demanded. Think about how much this makes sense! It explains why stores put things on sale.

8 Marginal Utility U:lity the amount of sa=sfac=on that someone gets from the use of a product Marginal u:lity the addi2onal sa=sfac=on that a person gets from consuming one more unit of a product Diminishing marginal u:lity the decrease in addi=onal sa=sfac=on that a person gets as more units of a product are consumed This means that the extra sa=sfac=on that we get from using addi=onal units of the product begins to decline. Because our sa=sfac=on is declining with each unit, our willingness to buy more of the product declines. This concept helps to explain the Law of Demand. Carl Menger ( ) Economist who challenged the tradi=onal belief that the value of a product is derived from the cost of the labor that goes into making that product. He believed that a product derives its value from the sa=sfac=on that consumers get from the product.

9 Chapter 4, Lesson 2 FACTORS AFFECTING DEMAND

10 Change in Quantity Demanded Change in quan:ty demanded movement along the demand curve showing that a different quan=ty is purchased in response to a change in price Consider the market demand curve for burritos at right. If the price of burritos is reduced from $5 to $3, the quan=ty demanded increases from 24 million to 40 million. This is a slide along the demand curve from point a to point b.

11 Effects Explaining the Change in Quantity Demanded Only a change in price can cause a change in quan=ty demanded. Here are two reasons why Income effect the por=on of a change in quan=ty demanded caused by a change in a consumer s income when the price of a product changes If prices go up, consumers don t have as much of their income to spend on this or other things. They are, in effect, poorer. So, they may buy less of this product. Subs:tu:on effect the por=on of a change in quan=ty demanded that is due to a change in the rela2ve price of the product. If the price of burritos goes up, consumers may replace buying burritos with buying less expensive products like burgers or pizza. So, they buy less burritos and buy different food instead.

12 Change in Demand Change in demand different quan==es of a product are demanded at every price, causing the demand curve to shij to the lej or to the right. This is caused by factors in the market other than price. A shij to the right is an increase in demand. A shij to the le9 is a decrease in demand.

13 Change in Demand (Shift) Change in the Price of Subs=tutes Change in the Price of Complements Changes in Consumer Tastes Consumer Expecta=ons for the Future Changes in Consumer Income Factors causing a change in demand (shij of curve) The Number of Consumers

14 Change in Demand (Shift) Changes in Consumer Income When people earn more, they are willing to buy higher quan==es at all possible prices. Higher income means an increase in demand and a shij right. Lower income means a decrease in demand and a shij to the lej. Changes in Consumer Tastes Adver=sing, fashion trends, peer pressure and a change in seasons all affect consumer tastes. A popularity increase means an increase in demand and a shij right. A popularity decrease means a decrease in demand and a shij lej. Changes in the Number of Consumers This can occur through a change in popula=on. An increase in the number of consumers means an increase in market demand and a shij right. A decrease in the number of consumers means a decrease in market demand and a shij lej.

15 Change in Demand (Shift) Change in the Price of Subs=tutes Subs:tute compe=ng products that can be used in place of one another Bueer and margarine or Coke and Pepsi Demand for a product increases (shijs right) if the price of a subs=tute increases. Demand for a product decreases (shijs lejs) if the price of a subs=tute decreases. Change in the Price of Complements Complement related products that are usually purchased together Paint and paintbrushes or computers and sojware Demand for a product increases (shijs right) if the price of a complement decreases. Demand for a product decreases (shijs lej) if the price of a complement increases. Change in Consumers Expecta=ons for the Future Predic=ng the effect of changes in consumer expecta=ons for the future requires specific details about the situa=on. An announcement that a new technology will be available in a year may decrease demand (shij lej) for exis=ng products as consumers delay purchases un=l the new product is released.

16 Chapter 4, Lesson 3 ELASTICITY OF DEMAND

17 Demand Elasticity Demand elas:city the extent to which a change in price causes a change in quan=ty demanded. (The market s responsiveness to a change in price.) Elas:c when a change in price causes a rela=vely larger change in quan=ty demanded (flat demand curve) Example: Vegetables, when one is expensive, you just buy a different one. Inelas:c when a change in price causes a rela=vely smaller change in quan=ty demanded (steep demand curve) Example: Cancer drug, you are not making a decision based on price but on whether or not you need it Unit elas:c when a given change in price causes a propor=onal change in quan=ty demanded

18 Elasticity and Pricing Elas:c Demand If a seller raises prices when demand is elas=c, they will make less revenue. If a seller lowers prices when demand is elas=c, they will make more revenue. Inelas:c Demand If a seller raises prices when demand is inelas=c, they will make more revenue. If a seller lowers prices when demand is inelas=c, they will make less revenue.

19 Determinants of Demand Elasticity Can the purchase be delayed? If a consumer cannot postpone the purchase, demand tends to be inelas=c. Example: prescrip=on drugs, cigareees Are adequate subs=tutes available? The more subs=tutes are available, the more elas=c the demand curve is. Example: food if one type is more expensive, you just buy less of it and more of something else less expensive. Loca=on is important too. If the price rises at one store, consumers will shop at a different store. This makes the demand elas=c, even if demand in the en=re market is inelas=c. Does the purchase use a large por=on of income? If the product requires a large por=on of consumer income, demand tends to be more elas=c. If the product requires only a small part of a consumer s income, demand is more inelas=c. Ex: pepper