Finance 510: Microeconomic Analysis Consumer Demand Analysis.
DEMAND UNIT 2: MICROECONOMIC CHAPTER 4. SEC. 1 WHAT IS DEMAND? What is Microeconomics? (individuals,...
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Transcript of DEMAND UNIT 2: MICROECONOMIC CHAPTER 4. SEC. 1 WHAT IS DEMAND? What is Microeconomics? (individuals,...
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DEMAND
UNIT 2: MICROECONOMIC
CHAPTER 4
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SEC. 1 WHAT IS DEMAND?
What is Microeconomics? (individuals, business, organizations)
What is Macroeconomics? (banking, government spending, labor wages, employment)
What is Demand?
- The desire, ability, and willingness to buy a product.
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LAW OFDEMAND
Quantity demanded of a good or service varies inversely with its price.
- when the price goes up, quantity demanded goes down.
- when the price goes down, quantity demanded goes up.
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DEMAND SCHEDULE
Is a listinglisting that shows the various quantity demanded of a particular product at all prices that might prevail (succeed) in the market at a given time.
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DEMAND CURVE
A graphgraph showing the quantity demanded at each and every price that might prevail in the market.
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THE MARKET DEMAND CURVE
Market Demand Curve- shows the quantities demanded by everyone who is interested in purchasing the product.
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DEMAND ANDMARGINAL UTILITY
Marginal Utility- The extra useful or satisfaction a person gets from acquiring or using more unit of a product.
Diminishing Marginal Utility- States that the extra satisfaction we get from using additional quantities of the product begins to diminish.
- You get more satisfaction from the first product.
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SEC. 2 FACTORS AFFECTING DEMAND
Change in the Quantity DemandedChange in the Quantity Demanded:
- A movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price.
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WHY DEMAND CHANGE?• Consumer Income -Is the change in quantity demanded
because of a change in price that alters consumer’s real income.
EX. When a product is on sale…people pay less, meaning we have extra money
• Consumer Tastes- when a product is advertise more people are going to end up liking the product
• Substitutes -Is the change in quantity demanded because of the change in the relative price of the product.
EX: Replace costly items with less expensive/ Tea and Cofee, butter and margarine
• Complements: Ex. Computers and software
• Change in Expectations- how people think about the future
• # of Consumers- more people want to buy a product more demand
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SEC. 3 ELASTICITY OF DEMAND
Elasticity-Elasticity- The degree to which a demand or supply curve reacts to a change in price.
Tells us how a dependent variable such as quantity responds to a change in an independent variable such as price.
Demand Elasticity- Demand Elasticity- Is the extend to which a change in price causes a change in the quantity demanded.
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In economics demand is elastic, when a given change in price causes a relatively larger change in quantity demanded.
Inelastic, means that a change in price causes a relatively smaller change in the quantity demanded.
Unit elastic, means that a given change in price causes a proportional change in quantity demanded. (usually the % change in quantity is equal the percent change in price)
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DETERMINANTS OF DEMAND ELASTICITY
Elasticity- the extend to which a change in price causes a Elasticity- the extend to which a change in price causes a change in the quantity demanded.change in the quantity demanded.
What makes the demand elastic or inelastic?What makes the demand elastic or inelastic?
-Three main questions:
Can the purchase be delayed?
Are adequate substitutes available?
Does the purchase use a large portion of income?
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CAN THE PURCHASE BE DELAYED?
Consumer’s need for a product cannot be delayed…. Inelastic because the quantity of the product demanded is not especially sensitive to changes in price.
- Gas (same amount of gallons)
- Insulin for diabetes/ Pills
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ARE ADEQUATE SUBSTITUTES AVAILABLE?
If substitutes are available people use them. (Less substitutes available more inelastic)
- if price for beef and butter= chicken and margarine.
- FedEx= U.S.P.S., however, they cannot increase prices due to technology.
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DOES THE PURCHASE USE A LARGE PORTION OF INCOME?
The amount of income required to make the purchase.
If the purchase required a large amount of income, demand tends to be elastic.
If the answer is no, then it is inelastic.
Ex. Medial equipment, medications is usually inelastic.
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THE TOTAL EXPENDITURESHow can we determine elasticity?
-Multiply the price of a product by the quantity demanded.