Presentation Pro Ch. 4 Demand Before we begin, there’s a couple of important things to recall :

Presentation ProPresentation Pro

Ch. 4 DemandCh. 4 Demand

Before we begin, there’s a couple of important things to recall :

Chapter 4 Section Main Menu

1. What is a “market”?

A market is created when______

Of their own free will, each side willingly ______

Point #1: The interaction b/t buyers and sellers determines the price of most goods and how much will be produced


Recalling Adam Smith & the “invisible hand”

• Goods & services produced in a market economy are the result of

Supply and Demand– If people want (demand) a particular

good/service, someone will likely supply it to make a profit

– So…let’s take a look at DEMAND


What is “demand”??

• Demand exists ONLY when the following are true:

1. Desire for the item

2. Ability to pay for it

3. Willing to pay for it


The Law of Demand

• As the price of a good increases, quantity demanded decreases

• Similarly, as the price of a good decreases, quantity demanded increases

• In other words: when price goes up, we buy less…when price goes down, we buy more

Price QD

QD Price


Why is this true?• 2 separate behaviors overlap:

A. the substitution effect

and

B. the income effect


The Substitution Effect

• occurs when we react to a price increase by consuming less of that good… and more of other goods that satisfy the same basic need

The Income Effect

• The qty of an item you consume changes if its price changes but your income does not


Demand Schedules

Individual Demand Schedule

Price of a slice of pizza

Quantity demanded per day

Market Demand Schedule

Price of a slice of pizza

Quantity demanded per day

$.50

$1.00

$1.50

$2.00

$2.50

$3.00

5

4

3

2

1

0

$.50

$1.00

$1.50

$2.00

$2.50

$3.00

300

250

200

150

100

50

The Demand Schedule

• An individual demand schedule is a table that lists the quantity of a good a person will buy at each different price.

• A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.


Market Demand Curve

3.00

2.50

2.00

1.50

1.00

.50

0

0 50 100 150 200 250 300 350Slices of pizza per day

Pri

ce p

er s

lic

e (i

n d

oll

ars)

Demand

The Demand Curve

• A demand curve is a graphical representation of a demand schedule.

• When reading a demand curve, assume all other factors in the market (income, population, etc.) remain constant. *

• *important point!


Limits of a Demand Curve• Can only be used to predict how people’s buying habits might change when price

and ONLY price changes

• To put it another way:

A demand curve is accurate for 1 specific set of market conditions


Now…it’s your turn:

Graphing a market demand curve:

• Horizontal axis shows quantity w/precise labeling

• Vertical axis shows price w/precise labeling

• Label lines, not spaces

• Be consistent in your “scaling”

• Provide specific title

• Write clearly and neatly!


Demand for Red Wine (bottles)

Price Qty. Demanded

$15.00 100

$14.00 150

$13.00 200

$12.00 300

$11.00 400

$10.00 500

$ 9.00 700

$ 8.00 1,000

$ 7.00 1,400

$ 6.00 2,000

Label your demand curve

D1


Sec. 2 Shifts of the Demand Curve

Objectives: Sort out the following…

(not necessary to write these down!)

• What is the difference between a “change in quantity demanded” and a “change in demand” ?

• What factors can cause a “change in demand” ?

• How does the change in the price of one good affect the demand for a related good?


Shifts in Demand

• Ceteris paribus is a Latin phrase economists use meaning “all other things held constant.”

• A demand curve is accurate only as long as the ceteris paribus assumption is true.

• If for some reason qty demanded at EACH and EVERY price changes, the entire demand curve will shift (move) to the left or right

• When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.


1. Income

Changes in consumers’ incomes affect demand:

“normal good”: a good consumers demand more of when their incomes increase.

“inferior good”: good that consumers demand less of when their income increases.

2. Consumer Expectations

Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good today.

3. Population

Changes in the size of the population also affects the demand for most products.

4. Consumer Tastes and Advertising

Advertising plays an important role in “helping us to know what we want” and therefore influences demand

What Causes a Shift in Demand?

• Several factors can lead to a change in demand:


The demand curve for one good can be affected by a change in the demand for another good.

Prices of Related Goods

• Complements are two goods that are bought and used together.

Example:

• Substitutes are goods used in place of one another.

Example:


Major Health Story!

• It has just been proven that consuming red wine will dramatically speed up the aging process. Studies prove that those who drank 5 glasses of wine per week with their dinner will shorten their lives by as much as 15 years.


• How will this news affect the demand curve for red wine???

(what will happen to the curve?)

• Now…construct a new demand curve for red wine

using the following figures: (label it D2)


Demand for Red Wine (bottles)

Price Qty. Demanded

$15.00 0

$14.00 50

$13.00 50

$12.00 100

$11.00 200

$10.00 300

$ 9.00 500

$ 8.00 800

$ 7.00 1100

$ 6.00 1600

Label this curve D2


Sec. 3 Elasticity of Demand

• What is “elasticity” of demand?

• What factors affect elasticity?

• How does a business use elasticity and total revenue to make decisions?


Elasticity of demand measures how much qty. demanded changes when there is a change in price.

What Is Elasticity of Demand?

• Demand for a good that doesn’t change much despite a price change

is

Inelastic

• The more demand reacts to a

change in price, the more

Elastic it is


Factors Affecting Elasticity

• Several different factors can affect the elasticity of demand for a certain good.

1. Availability of SubstitutesFew substitutes for a good? demand will not likely decrease as price increases. The opposite is also usually true. (eg heart surgery)

2. Necessities versus LuxuriesWhich would most likely be more elastic?

3. Relative ImportanceHow much of your budget you spend on the good? (eg: even if pepper doubles in price, you likely do not buy more)

4. Change over TimeDemand sometimes becomes more elastic over time because people can eventually find substitutes. (eg: gasoline)


The elasticity of demand determines how a change in prices will affect a firm’s total revenue or income.

Elasticity and Revenue

• total revenue: total amount of money the company receives from selling its goods or services.

• Firms need to be aware of the elasticity of demand for the good or service they are providing.

• If a good has an elastic demand, raising prices may actually decrease the firm’s total revenue.

Presentation Pro Ch. 4 Demand Before we begin, there’s a couple of important things to recall :

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