Chapter 4:1 Understanding Demand

Objectives o We will explain the law of

demand.

o We will examine how the

substitution effect and the

income effect influence

decisions.

Pro_12:12 The wicked desireth the

net of evil men: but the root of the

righteous yieldeth fruit.

What is demand?

• Demand is the desire

to own something and

the ability to pay for it.

• To have demand for a

good or service, both

of these conditions

must be present.

The Law of Demand: • That when a goods price is

lower, consumers will buy more of it.

• When the price is higher, consumers will buy less of it.

• All of us act out this law of demand in our everyday purchasing decisions.

The Law of Demand: • The law of demand is the

result of not one pattern of behavior but two separate patterns that overlap.

• These two behavior patterns are the substitution effect and the income effect describe two different ways what a consumers can change his or her spending patterns.

The Substitution Effect: • Takes place when a consumer

reacts to a rise in the price of one good, by consuming less of that good and more of a substitute good.

• The Substitution effect can also apply to a drop of prices.

• An example is someone loves pizza but the price increases, so that person instead buys a cheaper alternative such as tacos.

Discussion Question

• What are some items that you are willing to

substitute should the price goes up? List

five and explain why.

o Jer_17:9 The heart is deceitful above all things, and desperately wicked: who can know it?

o Pro_23:26 My son, give me thine heart, and let thine eyes observe my ways.

o Eze_36:26 A new heart also will I give you, and a new spirit will I put within you: and I will take away the stony heart out of your flesh, and I will give you an heart of flesh.

The income effect:

• Rising prices have another effect

that we have all felt.

• If you buy few slices of pizza

without increasing your purchases

of other foods, that is the income

effect.

Income Effect • One important fact to remember is

that economists measure consumption in the amount (quantity) of a good that is bought, not the amount of money spent to buy it.

• When the price goes up, consumers spend more of their money on a good but they may demand less of it.

• Thus, the income effect has led to a decrease in the quantity demanded.

A DEMAND SCHEDULE

• If you owned a store knowing the

demand schedule of one customer

might not be as helpful as knowing

how all of your customers would

react to price changes.

A DEMAND SCHEDULE

• When you add up the demand

schedules of every buyer in the

market, you can create a market

demand schedule.

• A market demand schedule

shows the quantities demanded

at various prices by all

consumers in the market.

A DEMAND SCHEDULE

• For example, a market demand

schedule for pizza would allow a

restaurant owner to predict the

total sales of pizza at several

different places.

A DEMAND SCHEDULE

• The owner of pizzeria could create a market demand schedule for pizza slices by surveying his or her customers and then adding up the quantities demanded by all individual consumers to each price.

• At higher prices the quantity demanded is lower.