Demand

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DemandDemandSECTION 1: Nature of Demand

SECTION 2: Changes in Demand

SECTION 3: Elasticity of Demand

CHAPTER 3

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Objectives:Objectives:How does demand differ from the quantity

demanded?What does the law of demand state?What do demand schedules and demand

curves illustrate?

Nature of DemandNature of DemandSECTION 1

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Difference between demand and the Difference between demand and the quantity demanded:quantity demanded: demand—amount of a good or service that a

consumer is willing and able to buy at various prices during a given period of time.

quantity demanded—amount of good or service that a consumer is willing and able to buy at each particular price during a given period of time.

Notice, that in both definitions- you must be willing and able to buy.


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Law of demand:Law of demand:As Price goes up, Quantity Demanded goes

down.


P Qd

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Income EffectIncome Effect

Change in purchasing power because of a change in price

1 chocolate bar-$1.00 On sale for $.50

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Substitution EffectSubstitution Effect

Substitute a similar lower priced product for one that is more expensive.Hershey bars cost $7.00 a piece. What are you

going to do? If Nestle chocolate bars were free, would you

demand 1,000,000,000 of them?

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Diminishing Marginal UtilityDiminishing Marginal Utility

As more units of a product are consumed, the satisfaction received from each additional unit declines.

This is why demand for a product is not limitless.

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What demand schedules illustrate:What demand schedules illustrate: Demand schedules

show in table format:the quantity of products consumers are willing and able to buy at a series of possible prices


Price Quantity Demanded

1.00 14000

2.00 9000

3.00 3000

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What demand curves illustrate:What demand curves illustrate: Demand curves show in graph format the

data listed in demand schedules

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Creating Demand ChartsCreating Demand Charts

1. Draw the appropriate Demand Curve for each Demand Schedule.

2. At which price does the seller receive the highest Total Revenue?

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1. 1. Draw the appropriate Demand Curve Draw the appropriate Demand Curve for each Demand Schedule.for each Demand Schedule.

2. 2. At which price does the seller receive At which price does the seller receive the highest Total Revenue?the highest Total Revenue?

#1Demand for gasoline in one week period.Quantity in gallons

Price Q-Demanded4.00 5000 gal3.95 10000 gal3.90 13000 gal3.85 26000 gal3.80 27000 gal3.75 28000 gal

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Quantity

4.00

3.90

3.80

3.75

5,000 10,000 15,000 20,000 25,000 30,000

Price

D1

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#2Demand for Pepsi sold at Quick Stopin one day.Quantity in cups of Pepsi.

Price Q-Demanded1.75 201.70 251.65 451.60 551.55 701.50 75

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Quantity

1.75

1.65

1.55

20 25 30 40 45 50 60 65 70 75 80 85

Price D1

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#3Demand for music CDs sold in one year.

Price Q-Demanded$25.00 10000$23.00 12000$20.00 15000$18.00 25000$15.00 27000$10.00 30000

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Quantity

25.00

10.00

10,000 30,000

Price

D1

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#4Demand for flip-flops at the local Target store in June.

Price Q-Demanded$15.00 180$13.00 200$11.00 300$9.00 400$7.00 850$5.00 1000

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Quantity

15.00

5.00

180 1,000

Price

D1

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This is the law of demandShown as movement along the Demand

Curve.This is caused only by change in price.

P Qd

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Price

Quantity

2000 4000 6000 8000 10000 12000 14000

3.00

2.00

1.00

What a Change in Qd Looks Like:

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When a product’s demand shifts, When a product’s demand shifts, different quantities of a product are different quantities of a product are demanded at each and every price.demanded at each and every price.

Changes in DemandChanges in DemandSECTION 2

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Price

Quantity

D1D2

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Determinants of product demand Determinants of product demand shifts:shifts:consumer tastes and preferencesmarket size incomeconsumer expectationsprices of related goods

Substitute Complementary


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Difference between substitute goods Difference between substitute goods and complementary goods:and complementary goods: substitute goods—used to replace the

purchase of similar goods when prices increase

complementary goods—commonly used with other goods


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Headlines:Headlines: For each Headline:

1. Determine what direction the demand curve will move.

2. Determine which determinant of demand is making the curve to move.

3. Draw the graph.

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Product: Hot DogsProduct: Hot DogsPrice of Hot Dog Buns Sky Rocket because

Wheat Producers go on strike!!!!

Direction? _____________

Determinant? _____________

Draw Graph:

Prices of Related Goods- Complementary

To the Left

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Price

Quantity

D1

D2

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Product: Hershey ChocolateProduct: Hershey ChocolateHershey Bars: Part of a Healthy Diet!

Shift?________

Det._________

Graph:

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Product: Apple iPodProduct: Apple iPodAmid Strong Sales Apple Doubles Prices of

all iPods.

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Product: Wal-Mart StockProduct: Wal-Mart StockWal-Mart Expected to have Best 4th Quarter

Earnings in 10 Years.

Shift?________

Det._________

Graph:

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Product: TelevisionsProduct: TelevisionsStudy Shows U.S. Citizens Making 75%

More Than 10 Years Ago.

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Product: Come up with your ownProduct: Come up with your ownHeadline: Come up with your own.

Trade with the person in-front of/behind you.

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Objectives:Objectives:What is demand elasticity?What is the difference between elastic and

inelastic demand?How is demand elasticity measured?

Elasticity ofElasticity of DemandDemandSECTION 3

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Demand elasticityDemand elasticity reflects the extent reflects the extent to which changes in a product’s price to which changes in a product’s price affect the quantity demanded by affect the quantity demanded by consumers. consumers.


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Difference between elastic and Difference between elastic and inelastic demand:inelastic demand:elastic demand—when a small change in a

product’s price results in a significant change in the quantity demanded


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Price

Quantity

P1

Q1

P2

Q2

Elastic Demand Curve

Small change in Price

Large change in Qd

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Difference between elastic and Difference between elastic and inelastic demand:inelastic demand: inelastic demand—when a change in a

product’s price has only a slight effect on the quantity demanded

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P1

Q1

P2

Q2

Big Change in Price

Small Change in Qd

Inelastic Demand Curve

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1.1. State the law of demand in your own words. Be sure to include how the income effect, the substitution effect, and diminishing marginal utility relate to the law of demand.

2.2. What causes movement along a demand curve—in other words, a change in the quantity demanded? How does this movement differ from a shift in demand?

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3.3. What is the difference between a complementary good and a substitute good? Give an example of each kind of good for each of these products: ice cream, baseball game tickets, pencils.

4.4. Why is determining demand elasticity important to business owners? How can business owners measure demand elasticity?

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CHAPTER 3

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Demand