Chapter 4Chapter 4

DemandDemandRetrieved from: http://info.rmxevo.com/blog/bid/334232/An-Important-Lesson-for-Northern-Virginia-Real-Estate

ObjectivesObjectives

• Explain the Explain the law of demandlaw of demand

• Understand how the Understand how the substitution effectsubstitution effect and the and the income effectincome effect influence influence decisionsdecisions

• Create Create demand scheduledemand schedule and and interpret data using interpret data using demand demand graphgraph

• Retrieved from: http://futures.tradingcharts.com/learning/law_of_demand.html

Terms you will need to know:Terms you will need to know:

• Demand

• Law of demand

• Substitution effect

• Income effect

• Demand schedule

• Market demand schedule

• Demand curve

• Retrieved from: http://www.africanmex.com/webpages/fundamental_analysis.html

DEMAND: DEMAND: The Desire to The Desire to own something and the own something and the ability to pay for itability to pay for it

• In a market system, the interaction of buyers and sellers determines the prices of most goods as well of what quantity of a good will be produced

• Buyers demanddemand goods,

and sellers supplysupply those goods.

Retrieved from: http://activerain.trulia.com/blogsview/4294793/nashville-s-2014-housing-market-forecast--still-a-seller-s-market-

Simply states that quantity demanded moves in the opposite direction of price (All other things constant or ceteris paribus).

•As price rises, quantity demanded decreases• P rises Q decreases

•As price falls, quantity demanded increases• P falls Q increases

The Law of Demand is the result of (2) separate patterns that overlap.

1)1)Substitution effectSubstitution effect: When consumers react to an increase in a good’s price by consuming less of that good and more of other goods.

• Example: If the price of the pizza you eat for lunch increases,

you will seek out alternative foods to such as burgers, tacos, etc. (Similarly, if the price of pizza falls, you will buy more pizza and less of other foods)

2)2)Income effectIncome effect: The change in consumption resulting from a change in real income

• Example: As prices increase you feel poorer because you can

no longer afford the same things with the money you make. The income effect then means that you will simply cut back on consumption rather than just finding alternatives (think about water, electricity, etc.)

•These two patterns describe two different ways consumers can change their spending patterns and explain why an increase in price decreases the quantity purchased.

* Retrieved from: http://www.bestthinking.com/articles/economics/macroeconomics/the-relation-between-supply-and-demand

What is a Demand Schedule:• * A table that lists the quantity of a

good a person will buy at each different price.

• * (Basically, a graph that outlines the relationship between price and quantity demanded for a certain good.)

• Types to consider:• Individual demand scheduleIndividual demand schedule: Places

emphasis on the specific quantities an individual is willing and able to purchase at a specific price.

• Market demand scheduleMarket demand schedule: Lists the quantity of a good all consumers in a market will buy at each different price.

• (Can be formed by surveying customers and adding up the quantities demanded by individual consumers at each price)

• Retrieved From: http://www.harpercollege.edu/mhealy/eco212i/lectures/ch3-18.htm

Individual and Market Demand Curves

Retrieved from: http://www.policonomics.com/supply-and-demand/

Section TwoSection TwoShifts on the Demand CurveShifts on the Demand Curve

Chapter 4Chapter 4DemandDemand

• Ceteris paribusCeteris paribus

• Normal GoodNormal Good

• Inferior GoodInferior Good

• ComplementsComplements

• SubstitutesSubstitutes

• Retrieved from: https://www.onlinetexts.com

Ceteris ParibusCeteris Paribus

•This is a Latin phrase that simply means, “ all other things held constant.”

•When dealing with basic demand and supply curves the assumption that only price will affect the increase or decrease of a quantity

•Decrease in quantity demandedDecrease in quantity demanded:

• Increase in price of goods

•Increase in quantity demandedIncrease in quantity demanded:

• Decrease in price of goods

• Remember: Under the idea of ceteris paribus, the change in Quantity (Q) is dependent on the Change in Price (P)

Other factors besides price can also cause the demand Other factors besides price can also cause the demand for a good to change.for a good to change.

•IncomeIncome: Simply, a change in income (either increase or : Simply, a change in income (either increase or decrease) can affect a consumer’s demand for goods. decrease) can affect a consumer’s demand for goods.

• Normal GoodNormal Good: A good that consumers demand more when their : A good that consumers demand more when their income increasesincome increases

• Inferior GoodInferior Good: A good that consumers demand less of when : A good that consumers demand less of when their income increases (generic brands)their income increases (generic brands)

• Consumer ExpectationsConsumer Expectations: Current demand for a good is : Current demand for a good is positively related to its expected future price positively related to its expected future price

• If you expect the price of an item to go up in a week your If you expect the price of an item to go up in a week your present demand will increase, if you expect it to go down in a present demand will increase, if you expect it to go down in a week your present demand will decrease)week your present demand will decrease)

•PopulationPopulation: Changes (increase/decrease) in population will : Changes (increase/decrease) in population will affect the demand for certain goods.affect the demand for certain goods.

•Consumer Tastes and AdvertisementConsumer Tastes and Advertisement: What is in style (fads : What is in style (fads in clothing , food, etc., )in clothing , food, etc., )

• The demand curve for one good may The demand curve for one good may be affected by the changes in demand be affected by the changes in demand of another goodof another good

• Two types of related goods that Two types of related goods that interact this way:interact this way:

• ComplementsComplements: Two goods that are bought and used together. • Skis & Ski boots ( an increase in the

price of one will result in the decrease in demand for the other because one item is useless without the other)

• SubstitutesSubstitutes: Goods used in place of one another• Buying snowboards as a substitute

for skis because the price of skis has increased.

Retrieved from: http://www.ers.usda.gov/amber-waves/2013-february/substitute-and-complementary-foods-are-important-when-assessing-impacts-of-price-policies-on-dietary-quality.aspx#.VKb_5XtkaPQ

Section ThreeSection Three

Elasticity of demandElasticity of demand

•Elasticity of DemandElasticity of Demand

• InelasticInelastic

•ElasticElastic

•Total revenueTotal revenue•Retrieved from: https://www.onlinetexts.com

• Are their certain products you could not do without? List three in your notes

• How would your list change if the prices of each doubled or even quadrupled?

• Are there some things in your list you can and cannot do without?

Retrieved from: http://economiclolo.blogspot.com/2013/07/price-elasticity-of-demand.html

• Elasticity of demandElasticity of demand::

• A measure of how consumers react to a change in price.Two types to consider:

• InelasticInelastic: Demand that is not very sensitive to a change in price

• Example:

Something you will keep buying no matter the change in price

• ElasticElastic: Demand that is sensitive to a change in price

• Example:

Something you will buy less of in the event of a price increase

Retrieved from: http://www.econs.com.sg/free-downloads/elasticity/

• Total Revenue: The total amount of money a firm receives by selling goods or services.

• Determined by two factors:

• 1) The price of the goods;

• 2) the quantity sold.

Retrieved from: http://ingrimayne.com/econ/elasticity/RevEtDemand.html