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Demand. Chapter 3. What is demand?. The willingness and ability to purchase a good or service Demand = Willingness and ability to purchase. The Law of Demand. As a price of a good increases the quantity demanded of the good decreases and vice versa

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Demand l.jpg

Demand

Chapter 3


What is demand l.jpg
What is demand?

  • The willingness and ability to purchase a good or service

  • Demand = Willingness and ability to purchase


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The Law of Demand

  • As a price of a good increases the quantity demanded of the good decreases and vice versa

    • Quantity Demanded – is there a difference between demand and quantity demanded?

      • A demand for popcorn

      • Buying the popcorn 2 bags for 1 dollar is quantity demanded


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Opposite Directions

  • Why do price and quantity demanded move in opposite directions?

    • Law of diminishing marginal utility

      • Candy experiment

    • As you obtain less utility from additional units you will only buy large quantities at low prices


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Demand Schedule

  • Law of Demand says…

    • The up / down relationship is inverse relationship

    • A chart showing the inverse is a demand schedule


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Demand Curve

  • 3-1 b shows the demand curve

    • Plotting connected points to show patterns

    • There are almost always patterns in economics


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What happens when said curve shifts?

  • Demand curves shifting right or left show more or less demand of a product at price

  • What causes these shifts?


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Income

  • As income goes up, people have the ability to purchase more of a good

    • This doesn’t necessarily mean they will

  • Normal Good – income goes up, purchase of that good goes up

  • Inferior Good – income goes up, purchase of that good goes down

  • Neutral Good – income goes up, purchase of that good stays the same


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Preferences

  • People prefer certain products

    • Types of video games


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Prices of Related Goods

  • Substitute Goods

    • Cars – Coffee / Tea – Video Games

  • Complements

    • Things that go together

      • Balls / Bats

      • PS2 / Games

      • Cars / Tires


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Number of Buyers

  • Certain goods are demanded more in certain areas

    • Surfboards / CA v. SD


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Change in Demand v. Change in Quantity Demanded

  • A change in demand refers to a shift in the curve

  • Change in quantity demanded = A movement from one point to another point on the same demand curve


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Responsibilities of Buyers

  • Researching

  • Ethics in paying


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Section 3

  • Elasticity of Demand

    • Relationship between percentage change in in quantity demanded and the percentage change in price

      % Change in quantity demanded

      Elasticity of demand = ----------------------------------------------------

      % Change in price


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Demand

  • Elastic demand – when quantity demanded percentage changes more than the price

  • Inelastic demand – when quantity demanded percentage changes less than the price

  • Unit Elastic demand – when quantity demanded and price have similar relationships


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Determinants of Elasticity

  • The number of substitutes has great effects on elasticity

    • Heart Medicines

    • Breads


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Luxuries v. Necessities

  • Luxury – don’t need it to survive

  • Necessity – Food, medicine…

    • Which goods are elastic?


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Percentages of Income

  • Making budgets on any level, percent of income is studied

  • Obvious which goods are more responsive to

  • Relationship to Time

    • Changing to adapt and adjust over time


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What does it matter?

  • All versions of elasticity matter, because they relate to total revenue


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Case 1

  • A rise in price does not necessarily mean a rise in revenue

    Elastic demand + Price rise = TR Decrease


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Case 2

  • If demand is elastic and price is decreased, revenue will go up

    • Elastic Demand + Price Decline = TR Increase


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Case 3

  • Inelastic demand + Price Rise = TR Increase

  • If demand is inelastic a price rise will lead to a revenue increase


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Case 4

  • If demand is inelastic and price declines, total revenue will decrease

  • Inelastic demand + Price decline = TR Decrease


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Unit Elastic

  • Equal forces in opposite directions

  • No change to total revenue


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