DEMANDDEMAND

CHAPTER 4CHAPTER 4

Goals & ObjectivesGoals & Objectives

1.1. Describe and illustrate the concept of Describe and illustrate the concept of demand.demand.

2.2. Describe how demand and utility are related.Describe how demand and utility are related.

3.3. What causes a change in demand.What causes a change in demand.

4.4. Describe factors that cause demand to Describe factors that cause demand to change.change.

5.5. Describe elasticity of demand.Describe elasticity of demand.

3 Characteristics of 3 Characteristics of DEMANDDEMAND

1. Desire to purchase1. Desire to purchase 2. Ability to purchase2. Ability to purchase 3. Willingness to pay3. Willingness to pay

To consume goods or servicesTo consume goods or services All 3 must be present for the marketplace All 3 must be present for the marketplace

to illustrate overall demand.to illustrate overall demand.

Economic DemandEconomic Demand

Microeconomics

• Deals with economic behavior and decision making with SMALL elements of society.--Individuals & Firms (business)

Macroeconomics: Study of gov’t economic policy and decision making.

The Law of DemandThe Law of Demand

PRICE increases Demand decreasesPRICE increases Demand decreases

PRICE decreases Demand increasesPRICE decreases Demand increases

The Law of Demand applies to individuals The Law of Demand applies to individuals and business firms only. and business firms only.

The Law of Demand is not an absolute.The Law of Demand is not an absolute.

Demand Curve & PriceDemand Curve & Price

Demand UtilityDemand Utility

Marginal UtilityMarginal Utility: the usefulness : the usefulness someone receives from buying one extra someone receives from buying one extra productproduct

Diminishing Marginal UtilityDiminishing Marginal Utility: the : the usefulness of extra diminishesusefulness of extra diminishes

““Buy one get one freeBuy one get one free”: Bananas vs. Shoes”: Bananas vs. Shoes

Marginal & Diminishing Marginal & Diminishing UtilityUtility

Factors Affecting DemandFactors Affecting Demand

1. 1. Income EffectIncome Effect: Increased PRICE : Increased PRICE lessens demand.lessens demand.

1.1. How do higher prices (inflation) and How do higher prices (inflation) and taxes effect Demand?taxes effect Demand?

GovernmentGovernment’’s Role Changing s Role Changing Income & DemandIncome & Demand: Entitlements, : Entitlements, Subsidies, Progressive TaxesSubsidies, Progressive Taxes

Taxes & Income EffectTaxes & Income Effect

Factors Affecting Demand

2. Substitution Effect: Change in quantity demanded effected by increase or decrease in price

1. Competition amongst suppliers/producers lowers prices which increases demand.

2. Governments Role: Regulations of new business start-ups, tariffs, subsidies, bailouts.

Change in DemandChange in Demand

• 1. Consumer Income:

• Tax Increases = less consumption = Increased Entitlements and Subsidies (Socialism).

• Tax Decreases = Increased consumption = Fewer Entitlements and Subsidies = lower taxes (Capitalism).

Personal Income & GDPPersonal Income & GDP

Change in DemandChange in Demand

• 2. Consumer Tastes: – Fads, Fashions, Trends, Natural Disasters,

new products

– Shoes, Vehicles, Hurricanes, Newest I-phone.

Trends, Demand & PricesTrends, Demand & Prices

Change in DemandChange in Demand

• 3. Substitutes: Competition among producers or sellers lowers prices which increases demand. Diversity among products & services creates competition which lowers prices and increases demand.

• 4. Complements: Computers and software, cameras and film

Change in DemandChange in Demand

• 5. Change in Expectations:

• Futures Market: I-Phone 6 or 7

• New Job & Income or No job & no income

• 6. Number of Consumers: More consumers equals higher demand which equals higher prices.

Demand ElasticityDemand Elasticity

How How priceprice and and quantity quantity of a product or of a product or service relates.service relates. Full Service Fuel Stations & Minimum Wage Full Service Fuel Stations & Minimum Wage

IncreasesIncreases

The extent at which a change in price The extent at which a change in price can change the quantity demandedcan change the quantity demanded

Example: $8 Gasoline vs. $8 MilkExample: $8 Gasoline vs. $8 Milk What happens to demand?What happens to demand?

Elasticity of DemandElasticity of Demand

Elastic DemandElastic Demand

A small change in price causes a relative A small change in price causes a relative large change in quantity demandedlarge change in quantity demanded Milk….$8.00 a gallon causes less demand Milk….$8.00 a gallon causes less demand

for milk.for milk. Government Subsidies Government Subsidies to dairy farmers to dairy farmers

have caused fewer suppliers of dairy which have caused fewer suppliers of dairy which causes higher milk prices. causes higher milk prices.

China Factor?China Factor?

How has free trade with India, China, How has free trade with India, China, Mexico, Vietnam affected Mexico, Vietnam affected interdependency on foreign interdependency on foreign governments, products, and governments, products, and services?services?

How has free trade with India and How has free trade with India and China affected the prices of goods China affected the prices of goods and wages sold in America?and wages sold in America?

Inelastic DemandInelastic Demand

A change in price causes little change A change in price causes little change in demand.in demand.

GasolineGasoline: A need within society. If : A need within society. If gas were to inflate to $8.00 a gallon, gas were to inflate to $8.00 a gallon, quantity demanded would change quantity demanded would change very little.very little.

Substitution Effect Substitution Effect would increase? Explain.would increase? Explain.

Gov’t regulation of oil supply reduces Gov’t regulation of oil supply reduces competition which increases prices.competition which increases prices.

Inelastic Demand & PriceInelastic Demand & Price

Elasticity and ProfitsElasticity and Profits

Elasticity is important to business!!!!Elasticity is important to business!!!!– Fringe Benefits or higher wages or lower Fringe Benefits or higher wages or lower

profits, increased production, cut variable or profits, increased production, cut variable or fixed costs? How has the Affordable Care fixed costs? How has the Affordable Care Act affected the elasticity of profits?Act affected the elasticity of profits?

JIT & JIC TheoryJIT & JIC Theory’’s of productions of production Marketing Techniques relative to Fads Marketing Techniques relative to Fads

and Fashions: Gap Jeans, Nike Tennis and Fashions: Gap Jeans, Nike Tennis Shoes, Wild Turkey, I-Phones: examples.Shoes, Wild Turkey, I-Phones: examples.