Econ Demand


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ch.3 ECON-demand

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Econ Demand

  1. 1. Elements of Microeconomics DEMAND: Chapter 3
  2. 2. Section 1: Nature of Demand <ul><li>How does your demand and time relate? </li></ul><ul><li>What is demand ? The amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period. </li></ul><ul><ul><li>Consumer must be willing and able to buy the good or service </li></ul></ul><ul><ul><li>Must be examined for a specific time period be it a day, a week, a month, a year, or some other definite period </li></ul></ul>
  3. 3. <ul><li>Law of demand: an increase in a good’s price causes a decrease in the quantity demanded AND that a decrease in price causes an increase in the quantity demanded. </li></ul><ul><ul><li>How does this hold true? </li></ul></ul><ul><ul><li>What affects this? </li></ul></ul><ul><ul><ul><li>Income effect: any increase or decrease in consumers’ purchasing power caused by a change in price. Example - more CDs with same money, how does this look in your life? </li></ul></ul></ul><ul><ul><ul><li>Substitution effect: tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive - generic products </li></ul></ul></ul><ul><ul><ul><li>Diminishing marginal utility: at some point, consumers cannot use any more of a product - a LIMIT TO CONSUMERS’ DEMAND </li></ul></ul></ul>
  4. 4. <ul><li>Demand Schedules: as price increases, the quantity demanded decreases </li></ul>5,000 $100 4,500 $200 3,750 $300 2,750 $400 1,500 $500 0 $600 Quantity Demanded Price per watch
  5. 5. <ul><li>Demand Curves: plots relationship between price of a product and the quantity demanded (the demand schedule) </li></ul><ul><li>Why? Can show at a glance the rate of change at each price </li></ul>
  6. 6. Section 2: Changes in Demand <ul><li>Markets do not stand still! </li></ul><ul><li>Factors can shift the entire demand curve of a product to the right or left </li></ul><ul><li>Determinants of demand: </li></ul><ul><ul><li>Consumer tastes and preferences: popularity rises and falls </li></ul></ul><ul><ul><li>Market Size: example, more people take up hiking, grander market for sale; example, government influence with global trade; example, technology can create new products and markets </li></ul></ul><ul><ul><li>Income: higher income, more spending; also, change in price can shift demand </li></ul></ul>
  7. 7. <ul><ul><li>Prices of Related Goods: substitute goods - affects consumers’ tendency to switch to lower-priced substitutes, an increase in a product’s price leads to increased demand for product’s substitute goods (vice versa); complementary goods - paintbrushes and paint, increase in product’s price causes decreased demand for product’s complementary goods </li></ul></ul><ul><ul><li>Consumer Expectations: optimism versus pessimism </li></ul></ul>
  8. 8. Section 3: Elasticity of Demand <ul><li>Questions and concerns of manufacturers, sellers, businesses: How much does the quantity demanded decrease when a product’s price increases? How many fewer people will go use the product? </li></ul><ul><li>Elasticity of demand: degree to which changes in a good’s price affect the quantity demanded by consumers </li></ul>
  9. 9. <ul><li>Elastic Demand: exists when a small change in a good’s price causes a major, opposite change in the quantity demanded </li></ul><ul><ul><li>Depends on: </li></ul></ul><ul><ul><ul><li>If the product is not a necessity </li></ul></ul></ul><ul><ul><ul><li>If there are readily available substitutes </li></ul></ul></ul><ul><ul><ul><li>If the product’s cost represents a large portion of consumers’ income </li></ul></ul></ul>
  10. 10. <ul><li>Inelastic Demand: exists when a change in a good’s price has little impact on the quantity demanded </li></ul><ul><ul><ul><li>Depends on: </li></ul></ul></ul><ul><ul><ul><ul><li>If the product is a necessity </li></ul></ul></ul></ul><ul><ul><ul><ul><li>If there are few or no readily available substitutes for the product </li></ul></ul></ul></ul><ul><ul><ul><ul><li>If the product’s cost represents a small portion of consumers’ income </li></ul></ul></ul></ul>
  11. 11. How to look at elasticity? <ul><li>It depends on what market you want to analyze </li></ul><ul><ul><li>General or specific </li></ul></ul><ul><ul><li>Think about milk - generally it is an inelastic product, but when you take a closer look it is very elastic… </li></ul></ul>
  12. 12. <ul><li>Measuring Elasticity: </li></ul><ul><ul><li>How do we measure this? Total revenue test - by monitoring any changes in a business’s (or market’s) total revenue before and after changes in the price of a product, you can determine the elasticity of demand for the product. </li></ul></ul><ul><ul><ul><li>A drop in a business’s total revenue from a price increase indicates elastic demand for the product (or vice versa) </li></ul></ul></ul><ul><ul><ul><li>A rise in total revenue because of a price increase indicates inelastic demand for business’s good or services </li></ul></ul></ul>