Demand

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Demand - PowerPoint PPT Presentation

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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Presentation Transcript

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
• 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
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
Demand Schedule
• Law of Demand says…
• The up / down relationship is inverse relationship
• A chart showing the inverse is a demand schedule
Demand Curve
• 3-1 b shows the demand curve
• Plotting connected points to show patterns
• There are almost always patterns in economics
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?
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
Preferences
• People prefer certain products
• Types of video games
Prices of Related Goods
• Substitute Goods
• Cars – Coffee / Tea – Video Games
• Complements
• Things that go together
• Balls / Bats
• PS2 / Games
• Cars / Tires
• Certain goods are demanded more in certain areas
• Surfboards / CA v. SD
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
• Researching
• Ethics in paying
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

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
Determinants of Elasticity
• The number of substitutes has great effects on elasticity
• Heart Medicines
Luxuries v. Necessities
• Luxury – don’t need it to survive
• Necessity – Food, medicine…
• Which goods are elastic?
Percentages of Income
• Making budgets on any level, percent of income is studied
• Obvious which goods are more responsive to
• Relationship to Time
What does it matter?
• All versions of elasticity matter, because they relate to total revenue
Case 1
• A rise in price does not necessarily mean a rise in revenue

Elastic demand + Price rise = TR Decrease

Case 2
• If demand is elastic and price is decreased, revenue will go up
• Elastic Demand + Price Decline = TR Increase
Case 3
• Inelastic demand + Price Rise = TR Increase
• If demand is inelastic a price rise will lead to a revenue increase
Case 4
• If demand is inelastic and price declines, total revenue will decrease
• Inelastic demand + Price decline = TR Decrease
Unit Elastic
• Equal forces in opposite directions
• No change to total revenue