Automobile Prices, Gasoline Prices, and Consumer Demand for Fuel
Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As...
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Transcript of Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As...
![Page 1: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/1.jpg)
Demand
![Page 2: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/2.jpg)
Demand
– The desire to own something, and the ability to pay for it.
• The Law of Demand– As prices go up quantity demanded goes down.– As prices go down quantity demanded goes up.
![Page 3: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/3.jpg)
Demand Curve
• The demand curve is a downward sloping line showing the inverse relationship between quantity and price
![Page 4: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/4.jpg)
Demand Schedule
![Page 5: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/5.jpg)
Market Demand
• Demand curves can show the demand for an individual, or for a “market” of any defined size (classroom, CPHS, Pleasant Hill, etc.)
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Substitution Effect
• The substitution effect takes place when there is a similar product which can be substituted if the price of the original product becomes too high.– Butter vs. Margarine– Coke vs. Pepsi (or any other soda, drink)
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Income Effect
• As income rises, demand for “inferior” products goes down, while demand for superior products rise.
• Wal-Mart vs. Bloomingdales
• Generic products versus Name brands
![Page 8: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/8.jpg)
Shifts in demand
• Shifts in demand come from changes other than the change in price
• Changing technology• Seasonal changes• Good or bad news• Income and inferior goods• Consumer expectations• Population• Consumer taste and
Advertising• Substitute and
Complimentary goods
![Page 9: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/9.jpg)
Elasticity of Demand
• Elasticity of demand is a concept dealing with the changes in demand due to price changes.
• The amount of change of demand versus the amount of change of price determines elasticity.
• If the change of demand is small, then the demand is called inelastic.
• If the change in demand is large, then demand is called elastic, like a rubber band.
![Page 10: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/10.jpg)
Calculating Elasticity• Elasticity is calculated by looking at the percentage change
in demand over the percentage change in price.
• If the result is less than one, the product is considered inelastic. E < 1
• If the number is over one, the product is considered elastic. E > 1
• If the number is exactly one, the elasticity is considered unitary elastic. E = 1
P rice e las tic ity o f d em an d =P ercen tag e ch an g e in q u an tity d em an d ed
P ercen tag e ch an g e in p rice
2 1 2 1
2 1 2 1
( ) /[( ) / 2]Price elasticity of demand =
( ) /[( ) / 2]
Q Q Q Q
P P P P
![Page 11: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/11.jpg)
Computing the Price Elasticity of Demand• If the price in this graph changes from $5 to $4, quantity
demanded will change from 50 to 100.
• This means that this section of the curve is elastic.
Demand is price elastic.
3percent 22
percent 67
5.00)/2(4.005.00)(4.00
50)/2(10050)(100
ED
$5
4Demand
Quantity1000 50
Price
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Inelastic Demand
• Inelastic demand is demand that changes little when the price changes. This kind of demand is usually considered a necessity, true for products like urgently needed medicines, energy, gasoline, or milk for children.
• Inelastic demand changes from person to person, depending of what each person considers a necessity, or a luxury. For some, cell phones might be considered an inelastic product.
• If private enterprise controls the market for inelastic goods, is this a good thing? Consider water and electricity.
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Figure 1 The Price Elasticity of Demand
(b) Inelastic Demand: Elasticity Is Less Than 1
Quantity0
$5
90
Demand1. A 22%increasein price . . .
Price
2. . . . leads to an 11% decrease in quantity demanded.
4
100
![Page 14: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/14.jpg)
Elastic Demand
• Demand for a product is considered elastic if the demand drops sharply when price increases.
• Elastic products are considered “luxuries”, where spending on them is not a priority.
• Items like seeing a movie or “fashionable” cloths would be more elastic than many other items.
![Page 15: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/15.jpg)
Figure 2 The Price Elasticity of Demand
(d) Elastic Demand: Elasticity Is Greater Than 1
Demand
Quantity
4
1000
Price
$5
50
1. A 22%increasein price . . .
2. . . . leads to a 67% decrease in quantity demanded.
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Unitary Elasticity
• Unitary elasticity is when the percentage change in price equals the percentage change in quantity.
• Sellers like this range because it is usually the region of maximum profit.
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Figure 3 The Price Elasticity of Demand
2. . . . leads to a 22% decrease in quantity demanded.
(c) Unit Elastic Demand: Elasticity Equals 1
Quantity
4
1000
Price
$5
80
1. A 22%increasein price . . .
Demand
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Extreme Conditions of Elasticity
• Sometimes demand for items is very elastic or very inelastic.
• A very elastic curve is almost flat.
• A very inelastic curve is almost vertical
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Figure 4 The Price Elasticity of Demand
(e) Perfectly Elastic Demand: Elasticity Equals Infinity
Quantity0
Price
$4 Demand
2. At exactly $4,consumers willbuy any quantity.
1. At any priceabove $4, quantitydemanded is zero.
3. At a price below $4,quantity demanded is infinite.
![Page 20: Demand. –The desire to own something, and the ability to pay for it. The Law of Demand –As prices go up quantity demanded goes down. –As prices go down.](https://reader035.fdocuments.us/reader035/viewer/2022062421/56649e675503460f94b638ff/html5/thumbnails/20.jpg)
Figure 5 The Price Elasticity of Demand
(a) Perfectly Inelastic Demand: Elasticity Equals 0
$5
4
Quantity
Demand
1000
1. Anincreasein price . . .
2. . . . leaves the quantity demanded unchanged.
Price
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Factors that affect Elasticity
• Availability of substitutes
• Relative importance
• Necessity or Luxury
• Time – Over a longer period of time, elasticity increases
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Changes Over Time
• When prices change, it can take some time before a substitute is found, thus leading to inelasticity over the short term.
• As time increases, elasticity increases as substitutes are found.
• For example, if gas prices rise enough, you might consider using public transport instead, though you may need to research which bus or rail connections will cover your needs.
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Elasticity and Pricing
• If a business knows it’s product is inelastic, it knows it can raise it’s price without much loss in demand.
• There is another side to the issue though, as a business might need to be careful about it’s company image. Consider the case of Cochabamba in Boliva, Bechtel, and the water supply (in “The Corporation”).