Standard SSEMI2a. Define the Law of Demand.

Demand Definition: The desire, ability, and

willingness to buy a product. (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t

willing he has NO demand for one)

Law of Demand states the quantity demanded of a good or service varies inversely with the price

Price

Quantity

D

em

an

de

d

Why does the Law of Demand occur?

The law of demand is the result of three separate behavior patterns that overlap:

1. The Substitution effect

2. The Income effect

3. The Law of Diminishing Marginal Utility

We will define and explain each…

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If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)

1. The Substitution Effect

If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.

2. The Income Effect

Why does the Law of Demand occur?

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Utility = Satisfaction

We buy goods because we get utility from them

The law of diminishing marginal utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease

In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit.

3. Law of Diminishing Marginal Utility

Why does the Law of Demand occur?

U-TIL- IT-Y

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Demand Curve A graph showing quantity demanded at

each and every price in the market.

Price

Quantity Demanded

Dem

and

Marginal Utility The extra usefulness or satisfaction a

person gets from acquiring or using one more unit of product

Diminishing Marginal utility: states the extra satisfaction we get from using additional quantities of the product begins to diminish

Marginal Extra

Change in Quantity Demanded A movement ALONG THE DEMAND

CURVE that shows the change in quantity in response to a change in price.

$100

100 units

Change in Demand When there is a CHANGE in DEMAND:

People are now willing to buy different amounts of the product at the same prices.

There are 6 factors that cause a change in demand:

Remember: NICEST

Number of Consumers

The market curve shifts as the number of consumers change.

With the U.S. population aging, demand for different products will increase

Consumer Income Changes in the amount a person makes

can cause a change in demand.

Complements Goods that are related The use of one increases the use of the

other Peanut butter and Jelly Chips and dip

Changes in Expectations

This refers to the way people think about the future.

If people believe that the future, their job or their lifestyle will experience significant change, consumer spending will likely decrease.

Substitutes

A product can be used in place of another product.

You can use Splenda or Equal for Sugar

Consumer taste

Consumers do not always want the same things over time.

Are Beenie Babies still popular? What about Smart phones?