Demand How the consumer influences how I make money Law of Demand

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Law of Demand

  • Part 1. As PRICE increases, DEMAND decreases
  • Part 2. As PRICE decreases, DEMAND increases
  • Price goes up
  • Demand goes down
  • Demand goes up
  • Price goes down
  • THEN
  • THEN

Demand Curve

  • A graph that illustrates the demand for a product
  • It shows how much consumer desire for a product changes as the price changes

Market Demand Curve: This curve illustrates the quantities of apple juice demanded at each price ay all consumers in the market.

  • Price of a bottle of Apple Juice
  • Quantity demanded per week
  • $0.75
  • 800
  • $1.00
  • 650
  • $1.25
  • 500
  • $1.50
  • 350
  • $1.75
  • 200
  • $2.00
  • 50

Elasticity of Demand

  • The degree to which changes in price cause changes in demand
  • or
  • If we change the price, will demand change a lot or a little?

Elastic Demand

  • If Demand for a good is very sensitive to changes in price, the demand is ELASTIC
  • Or
  • If prices changes a little bit, demand will change a lot!

Example of Elastic Demand

  • Price of pizza goes up even a little bit, demand goes down a lot.

Elastic Demand for Pizza Curve is FLAT

Inelastic Demand

  • Demand for a good that consumers will continue to buy despite a price increase is INELASTIC
  • OR
  • Even if price changes a lot, demand changes very little

Example of Inelastic Demand

  • The price of soap goes up a lot, the demand stays almost the same.

Inelastic Demand for Soap Curve is STEEP

Factors Affecting Elasticity

  • Several different factors can affect the elasticity of demand for a certain good.
  • 1. Availability of Substitutes
    • If there are few substitutes for a good, the demand will not likely decrease as price increases (inelastic), the opposite (lots of substitutes) is also usually true (elastic)
    • Ex. Gasoline has no substitutes- inelastic
    • McDonalds has many (Burger King, etc)- elastic

Factors Affecting Elasticity (Cont.)

  • 2. Relative Importance
  • Another factor determining elasticity of demand is how much of your budget you spend on the good.
  • Ex. Mortgage payment must be paid (inelastic)
  • Entertainment (movies, etc.) are elastic

Factors Affecting Elasticity (Cont.)

  • 3. Necessities vs. Luxuries
  • Whether a person considers a good to be a necessity or luxury has a great impact on the good’s elasticity of demand for that person.
  • Ex. Food (inelastic)
  • Jewelry (elastic)

Factors Affecting Elasticity (Cont.)

  • 4. Change over Time
  • Demand sometimes becomes more elastic over time because people can eventually find substitutes.
  • Ex. Blockbuster used to be the only place to rent videos (inelastic)
  • Netflix, Video on Demand, Pay Per View, are substitutes for Blockbuster (elastic)

Change in Demand

  • A demand curve is only accurate as long as there are no changes other than price that could affect a consumer’s decision
  • When factors other than price (non-price factors) affect the demand curve, the entire curve shifts to the left or to the right

Non-Price Factors that effect Demand

  • These factors will cause the demand curve to shift to the left (less quantity demanded) or to the right (more quantity demanded)

Change in Demand: Recently, Farley High School changed boys hockey from a varsity sport to an intramural sport. As a result, they needed to buy fewer hockey pucks. The decrease in demand is shown by a shifting demand curve.

1. Change in Income

  • As people earn more money, the demand for luxury goods will increase
  • As people earn less money, the demand for luxury goods will decrease
  • Ex. If I win the lottery, I’ll buy a Jaguar
  • If I get laid off, I’ll take the bus

2. Substitution Effect

  • If there is a substitute product, demand for an item may be influenced by the price of the substitute
  • Ex. If the price of butter goes up, people will substitute margarine.

3. Complimentary Products

  • The demand for an item will increase or decrease if the price of a complimentary product (something that goes with it) increases or decreases
  • Ex. If the price of hot dogs goes up, the demand for hot dogs goes down, thereby decreasing the demand for hot dog buns

4. Change in Attitudes

  • As people’s attitudes about products change, so does the demand
  • Ex. Fashion, music, food

How does Scarcity affect Demand?

  • If there is a scarcity of an item, the demand goes up.
  • Ex. Gasoline

How does a boycott affect demand?

  • If an item is being boycotted, there is little to no demand for the item.
  • Ex. During the Montgomery bus boycott, there was little or no demand for the Montgomery bus system.

How does the War in Afghanistan affect demand?

  • Increased demand for war-related resources
  • Ex. Metal (bullets, vehicles), cloth (uniforms), gas masks
  • Increased demand for news
  • Ex. News interruptions during television shows, new news stations, internet sites.

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