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Demand

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The Law of Demand

Demand: the desire for an item and the ability to pay for it

Law of demand: when price of good or service goes up, quantity demand goes down and vice versa

What is Demand?

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The Law of Demand

Price & Demand• Law of demand explains consumer behavior as well as economic

concept• Cheryl decides to spend money on DVDs

– at $15 each, Cheryl demands 3 DVDs– at $5 each, she demands 7 DVDs

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Demand Schedules

• Demand schedule—a table lists how much of an item an individual will buy at each price

• Market demand schedule—a table lists how much of an item all consumers will buy at each price

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Demand Curves

• Demand curve—a graph that shows amount of an item a consumer will buy at each price

• Market demand curve—amount all consumers will buy at each price

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Elasticity of Demand

• Elasticity of demand measures how responsive consumers are to price changes

Elastic—quantity demanded changes greatly as price changes

Inelastic—quantity demanded changes little as price changes

What is Elasticity of Demand?

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What Determines Elasticity?

Substitute Goods or Services• If no substitute for a product, demand tends to be inelastic ex.

gasoline• If there are substitutes for a product, demand tends to be elastic ex.

shoes

Necessity or Luxury • Necessity—something needed for life, demand is inelastic ex.

prescription medications• Luxury—something desired but not essential, demand for luxuries

tends to be elastic ex. BMW vs. Ford

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Vera Wang: Designer Responding to Demand

• Sophisticated wedding gowns not available for career women

• Wang created line of wedding gowns to meet demand

• Style became popular; other designers imitated

• Wang created more demand for her style by designing other products

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Reviewing Key Concepts

Explain the differences between the terms in each of these pairs:

• demand and law of demand• demand schedule and demand curve• market demand schedule and market demand curve

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• Law of diminishing marginal utility: additional benefit of each additional unit declines as each unit is used

• Income effect: amount people buy changes as purchasing power of their income changes

• Substitution effect: amount people buy changes as they buy substitute products

What Factors Affect Demand?

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Change in Quantity Demanded

– change in amount consumers buy because of change in price

– does not shift the demand curve itself

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Change in Demand

• Change in demand: caused by a change in the marketplace. It prompts people to buy different amounts at every price. Also causes shift in demand curve

• When we shift the demand curve, we assume – ceteris paribus: everything else is held constant

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Change in Income Causes Shift in Demand Curve

• As incomes of most consumers in a market change, so does total demand

• normal goods—demanded more when consumers’ incomes rise

• inferior goods—demanded less when consumers’ incomes rise

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Change in Population/Market Size Causes a Change in Demand

• Demand for most goods changes as market size changes– rise in population leads to increased demand – decrease in population leads to decreased demand

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Consumer Tastes/Advertising Causes a Change in Demand

• Consumer tastes change; products gain and lose popularity

• Consumers demand a greater amount of popular items at every price

• Sellers advertise to create demand for products

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Change in Consumer Expectations Cause a Change in Demand

• Expectations about future price of items affect individual behavior– expected rise or fall in price can decide whether to buy now or wait

• Expectations of all consumers in a market affect demand – Ex. because cars go on sale at end of summer, demand goes up

then

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Change in Price of Related Goods Causes a Change in Demand

Substitutes• products used in place of each other

– if price of substitute drops, people buy it instead of original item– if price of original item rises, people will buy substitute

Complements•goods that are used together

-a rise in demand for one increases the demand for the other-If price of one product changes, demand for both changes in same way. -If price of one rises, demand for both will drop

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Reviewing Key Concepts

Explain the differences between the terms in each of these pairs:

• change in quantity demanded and change in demand• income effect and substitution effect• normal goods and inferior goods• substitutes and complements

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Total Revenue Test

KEY CONCEPTS• Total revenue—amount of money company gets for selling its

products– Formula: TOTAL REVENUE = P (price) x Q (quantity sold)

• Total revenue test—shows total revenue from item at various prices– if total revenue increases after price drops, demand is elastic– if total revenue decreases after price drops, demand is inelastic

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Reviewing Key Concepts

Use each of these terms in a sentence that gives an example of the term:

• elastic• inelastic• total revenue

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Case Study: Fueling Automobile DemandBackground

• Demand for automobiles and all services connected with them is high• Car dealers want to sustain and increase demand for their product

What’s the Issue• How does demand affect your selection of a vehicle?

Thinking Economically1. How would the demand for automobiles be affected by information

presented in each of these documents? Support your answer with examples from the documents.

2. Identify and discuss the factors that affect elasticity of demand illustrated in these documents.

3. Explain how Documents B and C illustrate a cause and effect relationship in the demand for SUVs. Use evidence from these documents to support your answer.