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Understanding Demand

Students will be able to identify characteristics of the law of demand.

Students will be able to define and/ or identify the following terms:

Law of Demand

Substitution Effect

Income Effect

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Look at this demand curve.What happens to quantity purchased

as prices rise?

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Why do we purchase more when a saleoccurs?

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The Law of Demand

• The law of demand states that consumers buy more of a good when its price decreases.

• Conversely, consumers buy less of a good when its price increases.

• Consumers love low prices.

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It’s obvious, isn’t it? Consumerslove low prices.

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The Substitution Effect• One reason that the law of demand exists

is the substitution effect.

• The substitution effect occurs when a consumer reacts to an increase in a good’s price by buying less of that good and more of a similar yet cheaper good.

• When the price of orange juice rises, consumers substitute cheaper apple juice for orange juice.

E. NappIt really depends on the price, doesn’t it?

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The Income Effect

• The income effect is the change in consumption resulting from a change in income.

• In other words, when prices rise, your money buys less.

• Higher prices reduce your purchasing power.

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Lower prices allow consumers toincrease demand.

Lower prices increase consumers’purchasing power.

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A demand schedule records the quantitydemanded at various prices.

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A demand schedule can easily be converted to a demand curve.

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Economists love graphs because graphsprovide easy understanding of economic

concepts.

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If a picture is worth a thousand words,a graph is worth even more.

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Questions for Reflection:

• State the law of demand.

• Provide an example of the substitution effect.

• How does the income effect lead to the law of demand?

• What is a demand schedule?

• What is a demand curve?

• Why do economists love graphs?