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

Demand

• How the consumer influences how I make money

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.