Unit 2: Demand

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Connection to Circular Flow Model

1. Do individuals supply or demand?

2. Do business supply or demand?

3. Who demands in the product market?

4. Who supplies in the product market?

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3

DEMAND

What is the Law of Demand? All else being equal, quantity demanded of a good rises, as the price decreases. 6

What is DEMAND? Demand is the quantities that a person or market is ready, willing and able to buy.

(Ex. Bill Gates is able to purchase a Ferrari, but if he is NOT willing to buy one，Then he has NO demand for one)

LAW OF DEMAND

As Price Falls… …Quantity Demanded Rises

As Price Rises… …Quantity Demanded Falls

PriceQuantity

Demanded

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There is an INVERSE relationship between PRICE and QUANTITY DEMANDED

Example of DemandI am willing to sell several A’s in

AP Economics. How much will you pay?

Price Quantity Demand

edDeman

d Schedu

le8

Demand worksheet

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• If the price of CDs is $10, how many will people buy? ____________

• If the price of CDs is $20, how many will people buy? ____________

• If the quantity of CDs sold is 200, what is the price? ____________

• If the quantity of CDs sold is 100, what is the price? ____________

Demand Schedule for CDs at School

Quantity Demanded(monthly)

Price(dollars

)

30025020015010050

51015202530

• How many apples will students buy at 30 cents?

• How many apples will students buy at 80 cents?

• What effect does the price seem to have on the quantity of CDs and apples sold?

• Calculate total revenue (price X quantity):If the price of apples is 30 cents,

If 100 apples are sold,

If the price of CDs is $15.00, 10

Demand Schedule for Apples at SchoolQuantity Demande

d(weekly)

Price(cents)

40035025015010050

1020305080

100

Demand worksheet

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… 11

• 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

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Why does the Law of Demand occur?

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

2. The Income Effect

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Why does the Law of Demand occur?

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.

Discussion Questions:1. What does this have to do with the Law

of Demand?2. How does this affect the pricing of

businesses?

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Why does the Law of Demand occur?

Change

N/A

$54

$33

$15

$10

$5

Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

The Law of Diminishing Marginal Utility

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