What Is Demand?What Is Demand?

Ch. 4Ch. 4

DemandDemand

Demand- The willingness to buy a Demand- The willingness to buy a good or service and the ability to pay good or service and the ability to pay for it.for it.

We have many wants, big house, car, We have many wants, big house, car, expensive clothes, but we can’t expensive clothes, but we can’t always afford them.always afford them.

When we can’t afford them we have When we can’t afford them we have no actual demandno actual demand

Actual Demand- having the desire and Actual Demand- having the desire and ability to pay for a good or serviceability to pay for a good or service

Price Always Plays A Role In Price Always Plays A Role In DemandDemand

Law of Demand- When Law of Demand- When prices go down, prices go down, consumer demand consumer demand usually rises. When usually rises. When prices go up demand prices go up demand usually goes down.usually goes down.

Ex. PS3 costs $400.00 Ex. PS3 costs $400.00 and their sales are and their sales are down compared to down compared to XBOX 360 which costs XBOX 360 which costs $299.00. Sony is $299.00. Sony is trying to compete with trying to compete with Microsoft by cutting Microsoft by cutting pricesprices

How does the How does the law of demand law of demand apply to the apply to the game console game console wars between wars between Sony, Microsoft, Sony, Microsoft, and Nintendo?and Nintendo?

Displaying The Law of Displaying The Law of DemandDemand

Demand Schedule- Shows how much Demand Schedule- Shows how much of a good or service an of a good or service an individual/consumer is willing and able individual/consumer is willing and able to purchase at each price in a market. to purchase at each price in a market. Used by individualUsed by individual

Market Demand Schedule- Lists how Market Demand Schedule- Lists how much of an item all consumers are much of an item all consumers are wiling to purchase at each price. Used wiling to purchase at each price. Used by businesses to set pricesby businesses to set prices

Demand schedules show individuals Demand schedules show individuals and Market schedules show groupsand Market schedules show groups

Why do markets behave the Why do markets behave the same way as individuals?same way as individuals?

Ans- Because markets are made up Ans- Because markets are made up of individual consumers.of individual consumers.

Refer to Text pg 102-103Refer to Text pg 102-103

Demand Curve- graphically shows Demand Curve- graphically shows data from a demand scheduledata from a demand schedule

Market Demand Curve- graphically Market Demand Curve- graphically shows data from Market Demand shows data from Market Demand Schedule.Schedule.

Sect. 2 What Factors Affect Sect. 2 What Factors Affect Demand?Demand?

What influences you when you What influences you when you decide to buy a good or service?decide to buy a good or service?

Why do you think the demand Why do you think the demand schedule curve slopes downwards? schedule curve slopes downwards?

What influences you when What influences you when purchasing goods and services?purchasing goods and services?

Diminishing Marginal UtilityDiminishing Marginal Utility

States the marginal benefit of using States the marginal benefit of using one more unit of a product each time one more unit of a product each time drops as we use more.drops as we use more.

Refresher, Utility is the benefit we Refresher, Utility is the benefit we get from using a good or service.get from using a good or service.

Example Example

You are hungry and You are hungry and decide to go to Arby’s. decide to go to Arby’s. You would normally buy You would normally buy one meal to satisfy your one meal to satisfy your hunger. Each additional hunger. Each additional meal you buy will lead meal you buy will lead to less personal benefit to less personal benefit and a sick stomach.and a sick stomach.

Example ContinuedExample Continued

Because you receive less satisfaction Because you receive less satisfaction from purchasing more than one meal from purchasing more than one meal the consumer expects the price to the consumer expects the price to drop as well. Hence, the 5 for $5 drop as well. Hence, the 5 for $5 Dollar Deal at Arby’sDollar Deal at Arby’s

This creates This creates the downward the downward slope on the slope on the demand curve demand curve which we call which we call diminishing diminishing marginal utilitymarginal utility

Refer to chart Refer to chart on page 107on page 107

Two patterns cause consumers Two patterns cause consumers to buy less at higher pricesto buy less at higher prices

Income Effect- change in the amount Income Effect- change in the amount a person will buy because the a person will buy because the purchasing power of their income purchasing power of their income changeschanges

Ex. You want to buy a video game. Ex. You want to buy a video game. One is $30 and the other game costs One is $30 and the other game costs $50. Buying the $30 game makes $50. Buying the $30 game makes you feel twenty bucks richer. If the you feel twenty bucks richer. If the overall price of all games would rise overall price of all games would rise to $50, you would buy less games.to $50, you would buy less games.

Substitution Effect- a change in the Substitution Effect- a change in the amount that consumers will buy amount that consumers will buy because they buy the substitute because they buy the substitute product instead.product instead.

Ex. Post Raisin Bran and Great Value Ex. Post Raisin Bran and Great Value Raisin Bran. Raisin Bran.

ExampleExample

You go to the mall to buy an $80 pair You go to the mall to buy an $80 pair of shoes. You find a pair of shoes on of shoes. You find a pair of shoes on sale for $55 dollars. sale for $55 dollars.

You substitute similar good for a You substitute similar good for a cheaper versioncheaper version

Give a real world of example of how Give a real world of example of how the substitution effect causes the substitution effect causes consumers to buy less at higher consumers to buy less at higher pricesprices

Change In Quantity Change In Quantity DemandedDemanded

This is where the amount demanded This is where the amount demanded by the consumer either increases or by the consumer either increases or decreases with pricedecreases with price

Refer to chart on page 108Refer to chart on page 108 How would a demand curve on a How would a demand curve on a

demand schedule and market demand schedule and market schedule differ?schedule differ?

Ans. Market takes into consideration Ans. Market takes into consideration larger quantities due to looking at the larger quantities due to looking at the whole marketwhole market

6 Factors That Change 6 Factors That Change DemandDemand

Change in demand occurs when Change in demand occurs when something prompts consumers to something prompts consumers to buy different amounts at every pricebuy different amounts at every price

Factor 1- Income- when a person’s Factor 1- Income- when a person’s income goes up or down the amount income goes up or down the amount of purchases will go up or downof purchases will go up or down

Make less $ demand lessMake less $ demand less

Most times the more you make the Most times the more you make the demand goes up. Goods that fall into demand goes up. Goods that fall into this category are normal goodsthis category are normal goods

Normal Goods- goods consumers Normal Goods- goods consumers demand more when income risesdemand more when income rises

Some goods the demand decreases Some goods the demand decreases when income riseswhen income rises

Inferior Goods- goods you want less Inferior Goods- goods you want less of when income risesof when income rises

Example of Inferior GoodsExample of Inferior Goods

Before pay Before pay raise you raise you rented an rented an apartment. apartment. With your new With your new job and a job and a higher salary higher salary you decide to you decide to buy a home.buy a home.

Factor 2 Market SizeFactor 2 Market Size

Deals with the number Deals with the number of consumers within a of consumers within a marketmarket

Ex. A college town- Ex. A college town- during school months during school months the market for the market for restaurants and fast food restaurants and fast food increases. During the increases. During the summer months demand summer months demand changes due to students changes due to students going home for the going home for the summer.summer.

Pop. Shifts or migration Pop. Shifts or migration can effect market size can effect market size and demandand demand

Ex. Beaver Counties Ex. Beaver Counties population in 1970 was population in 1970 was 208,418 and in 2006 was 208,418 and in 2006 was 177,736177,736

With the collapse of the With the collapse of the steel industry came a steel industry came a drastic drop in pop. This drastic drop in pop. This has led to a smaller has led to a smaller market place in the market place in the countycounty

Decrease in pop.= less Decrease in pop.= less demand for goods and demand for goods and servicesservices

Factor 3 Consumer TastesFactor 3 Consumer Tastes

If a good or service is popular, people If a good or service is popular, people buy it at any price. Once it loses buy it at any price. Once it loses popularity price goes down.popularity price goes down.

What could influence a rise in What could influence a rise in consumer popularity?consumer popularity?

Advertising pays a key role in this Advertising pays a key role in this factor. Advertisers are looking to factor. Advertisers are looking to create demand for a productcreate demand for a product

Factor 4 Consumer Factor 4 Consumer ExpectationsExpectations

Do you think the best price Do you think the best price to buy a good or service is to buy a good or service is now or in the future? If its in now or in the future? If its in the future, you may wait to the future, you may wait to buy the product. This causes buy the product. This causes a rise in demand at a later a rise in demand at a later date.date.

Ex. I-Phone- A couple of Ex. I-Phone- A couple of years from now the demand years from now the demand will increase and prices will will increase and prices will dropdrop

ExampleExample Cars are Cars are

usually usually cheaper in cheaper in the summer the summer because because dealerships dealerships are trying to are trying to make room make room on the lot on the lot for the for the newer newer models that models that arrive in the arrive in the fall.fall.

Factor 5 SubstitutesFactor 5 Substitutes

These are goods and services that These are goods and services that can be used in place of each other. can be used in place of each other. They are interchangeable. They are interchangeable.

Ex. Price of gas is over $3 a gallon. Ex. Price of gas is over $3 a gallon. You decide to take public You decide to take public transportation instead of driving. transportation instead of driving. Demand for public transportation Demand for public transportation goes up and personal consumption of goes up and personal consumption of gas goes downgas goes down

You are You are substituting public substituting public transit for your transit for your own carown car

Demand for the Demand for the substitute substitute increases= drops increases= drops in demand for the in demand for the originaloriginal

Heating Oil price Heating Oil price increases, which increases, which may lead to people may lead to people substituting a substituting a wood burner for a wood burner for a oil furnaceoil furnace

Factor 6 ComplementsFactor 6 Complements

When the use of one When the use of one product increases, an product increases, an accessory or accessory or accompanying product accompanying product of the original of the original increasesincreases

Ex. DVD Players and Ex. DVD Players and DVDSDVDS

Ex. HD TVs and HD Ex. HD TVs and HD cable servicecable service

Section 3 What is Elasticity of Section 3 What is Elasticity of Demand?Demand?

Price and Demand go hand and handPrice and Demand go hand and hand Price, consumer buying habit, and the Price, consumer buying habit, and the

importance of the good or service play importance of the good or service play a key role in demand.a key role in demand.

Price increase does not always change Price increase does not always change demanddemand

Consumers respond to price change Consumers respond to price change and we measure this with elasticity of and we measure this with elasticity of demanddemand

Elasticity of DemandElasticity of Demand

It measures how It measures how responsive responsive consumers are to consumers are to price change. price change. How flexible will How flexible will their wallets and their wallets and buying habits buying habits be?be?

Ex. Elastic BandEx. Elastic Band Demand can be Demand can be

elastic or elastic or inelasticinelastic

Elastic DemandElastic Demand

Demand is elastic when price change of Demand is elastic when price change of a good or service drives demand way up a good or service drives demand way up or way downor way down

Ex. If the price of a Dell Computer drops Ex. If the price of a Dell Computer drops by 10% and demand increases by 20%, by 10% and demand increases by 20%, this means this good is elastic.this means this good is elastic.

When price rises 10% people decide to When price rises 10% people decide to buy a substitute product. An HP buy a substitute product. An HP computercomputer

Products that have lots of substitutes are Products that have lots of substitutes are usually elasticusually elastic

Inelastic DemandInelastic Demand

If quantity demanded changes little If quantity demanded changes little as price goes up or down.as price goes up or down.

Price has little impact on inelastic Price has little impact on inelastic products.products.

Usually have few if any substitute Usually have few if any substitute productsproducts

Ex. Price of MilkEx. Price of Milk

Overtime Elasticity of A Overtime Elasticity of A Product Can ChangeProduct Can Change

The more substitutes The more substitutes for the original the for the original the are made overtime, are made overtime, then the more elastic then the more elastic a product may a product may become.become.

This can change price This can change price and demand.and demand.

Ex. Hybrid Cars- Right Ex. Hybrid Cars- Right now there are not now there are not many options. In the many options. In the future, there will be future, there will be more substitute more substitute versions.versions.

Refer to charts Refer to charts showing showing elastic and elastic and inelastic inelastic demanddemand

Elastic curves Elastic curves bowbow

Inelastic Inelastic curves show curves show no changeno change

Unit Elastic- when percentage Unit Elastic- when percentage change in price and demand are the change in price and demand are the same same

Ex. Price rises 5% and quantity Ex. Price rises 5% and quantity demand falls 5%demand falls 5%

Unit Elastic is the middle ground Unit Elastic is the middle ground between elastic and inelasticbetween elastic and inelastic

3 Factors That Affect Elasticity 3 Factors That Affect Elasticity of Demandof Demand

Factor 1- Substitute Goods or Factor 1- Substitute Goods or ServicesServices

The more options or substitutes you The more options or substitutes you have for the consumer, the more have for the consumer, the more elastic the goodelastic the good

The fewer substitutes, the more The fewer substitutes, the more inelastic a good or service becomesinelastic a good or service becomes

Factor 2Factor 2

Proportion of Income- the percentage Proportion of Income- the percentage of our income you spend on goods or of our income you spend on goods or services affects elasticity.services affects elasticity.

Ex. You spend 10% of your income Ex. You spend 10% of your income on video games. Price of games on video games. Price of games rises, you buy less games. This leads rises, you buy less games. This leads to more elastic demand. You will to more elastic demand. You will look for other options or substitutes look for other options or substitutes for that productfor that product

ExampleExample

You spend a smaller percentage of You spend a smaller percentage of income on a Sunday paper. Price of the income on a Sunday paper. Price of the paper rises, but you still buy that paper.paper rises, but you still buy that paper.

There are few subs for that paper and it There are few subs for that paper and it is a small percentage of your income is a small percentage of your income spent. spent.

This leads to a more inelastic demand.This leads to a more inelastic demand. Income Rises=Demand Up Income Income Rises=Demand Up Income

lowers=demand downlowers=demand down

Factor 3 Necessities VS Factor 3 Necessities VS LuxuriesLuxuries

Necessities are inelastic. You need Necessities are inelastic. You need them and price rise does not matter. them and price rise does not matter. Food, water and shelterFood, water and shelter

You still have to buy them, but you You still have to buy them, but you may buy a little less.may buy a little less.

Your change in demand will still be Your change in demand will still be smaller than the price hike, so it smaller than the price hike, so it remains inelasticremains inelastic

Luxuries you don’t need.Luxuries you don’t need. There are many substitutes for There are many substitutes for

luxury items, which creates an luxury items, which creates an elastic demand for those goodselastic demand for those goods

Calculating Elasticity of Calculating Elasticity of DemandDemand

Businesses calculate Elasticity of Businesses calculate Elasticity of Demand to set prices for goods and Demand to set prices for goods and servicesservices

Elastic Prices- businesses may cut Elastic Prices- businesses may cut prices to make more profit and create prices to make more profit and create more demand. Ex. Faygo Pop vs Pepsimore demand. Ex. Faygo Pop vs Pepsi

Inelastic Prices- price cuts won’t help, Inelastic Prices- price cuts won’t help, you don’t have to worry about you don’t have to worry about substitute goods or servicessubstitute goods or services

To determine Elasticity of Demand To determine Elasticity of Demand economists look to see if percentage economists look to see if percentage in quantity demanded by consumers in quantity demanded by consumers is greater than the percentage is greater than the percentage change in pricechange in price

Formula- Elasticity of Formula- Elasticity of DemandDemand

STEP 1 Original Quantity- New Quantity Original Quantity- New Quantity Original Price X 100=

= Percentage Change in Demand

STEP 2 Original Price- New Price Percentage Change in Price X

100=

= Percentage Change in Price

STEP3 STEP3 %Change in Quantity%Change in Quantity

% Change in Price = Elasticity

If the final number is greater than 1, If the final number is greater than 1, the demand is elastic. Less than 1, it the demand is elastic. Less than 1, it is inelastic.is inelastic.

Economists calculate Total Revenue Economists calculate Total Revenue (money made selling a good or service) (money made selling a good or service) to measure elasticity to measure elasticity

Price X Quantity Sold = Total RevenuePrice X Quantity Sold = Total Revenue You can look at the results of revenue by You can look at the results of revenue by

plugging in different prices X quantity plugging in different prices X quantity sold.sold.

This is known as the Total Revenue TestThis is known as the Total Revenue Test