DEMAND Whatcha Whatch Whatcha Whatcha Want! (and are able to buy)
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Transcript of DEMAND Whatcha Whatch Whatcha Whatcha Want! (and are able to buy)
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DEMANDWhatcha Whatch Whatcha Whatcha
Want! (and are able to buy)
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Demand
• The DESIRE, ABILITY, and Willingness of a consumer to buy a product. • Ex: just wanting a product does not mean
you have demand for it. I may want a Rolls Royce Car, but I do NOT have the ability to pay for it, so I do not have demand for it.
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How is demand for a product measured?
• Demand is the amount of a good or service that consumers are willing and able to buy at a given price• Example: at $4 each, I may buy 5 books, but
at $10 each I may only buy 2. The quantity I demand shifts based on the given price.
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Conditions of Demand
• 1. Consumers must be willing and able to buy the product.
• Demand for a House? Candy Bar? Lexus?
• 2. Demand can only be measured for a specific period of time because it changes.• What if I won the lottery tomorrow? Would
my demand for a House or a Lexus change?
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The Law of Demand
• There is an inverse relationship between the price of a product and the quantity demanded by consumers.
• As the price of the product increases the quantity demanded decreases.
• As the price of the product decreases the quantity demanded increases.
• CD Example?
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Income Effect
• A person’s ability to buy a product is determined by the size of his/her income relative to the price of the product.• Things seem expensive or cheap to you
depending on your income.
• Example: If I make $50,000 a year, I have a strong ability to buy a candy bar. However I do not have a strong ability to buy a $1 million house.
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Income Effect, cont’d.
• If the price of a product goes down, the consumer’s income has a greater ability to buy the product. This is an increase in the quantity demanded. Therefore the consumer is likely to buy a greater quantity of the product.
• A lower price increases the purchasing power of your income
• Example?
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Income Effect, cont’d.
• If the price of the product goes up, the consumer’s income has a weaker ability to buy the product. (a lower quantity demanded). Therefore, the consumer is likely to buy a smaller quantity of the product.
• A higher price decreases the purchasing power of your income.
• Example?
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Substitution Effect
• A change in the quantity (amount) that a consumer will buy because they are buying substitute goods instead.
• Example: If coffee gets too expensive, I will switch to tea.
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Diminishing Marginal Utility
• Can you remember, what is Utility??
• Marginal Utility: The happiness or satisfaction we receive from one additional unit.
• CANDY BAR EXAMPLE
• Diminishing Marginal Utility: The more we use or consume a product, the less use or satisfaction we receive from it.• Example: Buffet Restaurant
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Law of Diminishing Marginal Utility
• As the price of a product decreases, the quantity demanded increases (that’s the law of demand) UNLESS or UNTIL, the consumer begins to experience diminished marginal utility.
• Basically: if you think something is cheap, you will keep buying a high quantity of it, until you do not feel any satisfaction from getting just one more.
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Write your script
• Write out a brief script of a conversation between a buyer and a seller where as the price of a product decreases, the quantity demanded increases unless or until the consumer begins to experience diminished marginal utility.
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Demand Schedules and Curves
• A demand schedule is a list of possible prices of a product and the corresponding quantity demanded.• Basically how much you would want of something at a
given price.
• A demand curve is a graph that illustrates the inverse relationship between price and quantity demanded.
• All demand curves slope downward from left to right showing that as priced decreases quantity demanded increases
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A Demand Schedule• Price x Quantity = total revenue
• As price rises the quantity demanded falls
Price Per DVD
Quantity Demanded
30 50
25 75
20 100
15 125
10 175
5 30050 75 100 125 175 300
0
5
10
15
20
25
30
35Demand Schedule
Demand Schedule
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Chart your own!Price per
shirtQuantity
demanded12 1010 208 306 404 502 60
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Changes in Quantity Demanded
• Changes in the quantity demanded can ONLY be causes by changes in price
• Changes in the quantity demanded result in movement along the demand curve.
• Changes in the quantity demanded are explained by the law of demand which states that as price decreases, the quantity demanded increases.
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•A change in price will result in movement along the curve (sliding up or down on the curve)
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Changes in Demand
• Sometimes consumers will demand more or less of the product even though the prices HAS NOT CHANGED.
• A change in demand occurs whenever more or less of the product is demanded at every price.
• * A change in demand causes a SHIFT in the curve.
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•Notice how the entire curve shifts out! D1D2
D1 D2
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Non-Price Factors (Determinants) of Demand
• A change in demand can ONLY occur when there is a change in something other than price!
• An increase in demand causes
the curve to shift to the RIGHT
• A decrease in demand causes the
curve to shift to the LEFT
D1D2
P
Q
Q
P
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Non-Price Determinants of Demand
• These are the ONLY things that can change demand!! A change in the price will only change the quantity (amount) you demand. These things change your willingness or ability to buy the product!
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Consumer Tastes and Preferences
• When a good or service enjoys high popularity consumers demand more of it.
• Advertising: the strongest influence on consumer tastes
• Examples?
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Consumer Income
• As a consumer’s income changes, so does their ability to buy products. (getting raises or getting your hours cut)
• Normal Goods: goods that consumers demand more of when their income rises (expensive clothing)
• Inferior Goods: goods that consumers demand less of when their income rises (used books, generic brand food)
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Market Size (# of consumers)
• If the number of consumers increases or decreases the market size changes and affects demand.• Example: The Jersey Shore: demand for
pizza on the Jersey shore is very high from June-August, but drops A LOT the rest of the year.
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Consumer Expectations
• What you expect about the future can affect your buying habits today.• Example: Wall Street employees get
bonuses at the end of the year so they wait until January to make major purchases
• Other Examples?
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Price of Related Goods
• Substitutes: goods and services that can be used in place of each other. If the price of a substitute good drops, demand for the substitute will increase and demand for the original good will decrease. Ex. Coffee/tea
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Prices of Related Goods
• Complements: goods that are used together so that a rise in demand for one, increases the demand for the other. Also if the price for one product rises, demand for both will fall.
• Example: Peanut butter and Jelly, Ipods and MP3s
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Elasticity of Demand
• Elasticity of Demand: The extent to which changes in price cause changes in the quantity demanded.• Basically, how much the quantity you
demand can
STRETCH
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Elastic Demand
• A change in the price causes a relatively large change in the quantity demanded• If beef gets too expensive, customers will
switch to chicken and the quantity demanded for beef will decrease.
• Demand is elastic if the calculation is greater than 1.
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Inelastic Demand
• A change in price causes a relatively small change in the quantity demanded.
• Example: if the price of insulin goes up everywhere, people will diabetes will still buy the same amounts because they need it to survive.
• Demand is inelastic if the calculation is less than 1.
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Unit Elastic
• A change in prices causes a proportional change in quantity demanded.• Example: If the price of an item goes up
10%, the quantity demand goes down 10%
• Demand is unit elastic if the calculation is exactly 1.
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What determines Elasticity?
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Are adequate substitutes available?
• If adequate substitutes are available then demand tends to be elastic.• Example: If the price of beef goes up, people can
substitute chicken, pork, fish, tofu. (causing a relatively large change in the quantity of beef demanded)
• If adequate substitutes are not available then demand tends to be inelastic• Example: If the price of insulin goes up, diabetics will
still buy the same amount of it (causing a relatively small change in the quantity demanded)
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What proportion of your income do you spend on the good?
• If I spend a high proportion of my income then demand is elastic• Example: I spend 15% of my income on an expensive
hobby. If the price of the goods associated with that hobby goes up, I can just cut back on how much I do that hobby
• If I spend a low proportion of my income then my demand is inelastic• Example: if the price of pencils goes up it will not
affect my quantity demanded because I spend so little on these items anyways.
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Can the Purchase be Delayed? (necessity or luxury)
• If the purchase can be delayed demand is elastic• Example buying plane tickets to go on a
vacation
• If the purchase cannot be delayed, demand is inelastic• Example: buying plane tickets to attend a
family member’s funeral.
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Calculating Elasticity of Demand
• Why do we need to calculate elasticity of demand?
• Businesses use it to determine the need for price cuts
• If demand is elastic (greater than 1) then price cuts might help the business earn more.• Beef
• If demand is inelastic (less than 1) price cuts will not help the business earn more• Insulin
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How to Calculate Demand Elasticity
• You will need to know 4 pieces of information1. Original quantity
2. New quantity
3. Original price
4. New price
• You will also most likely need a calculator to complete these problems
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The StepsStep 1:
Original quantity — New quantity X 100 = percentage change in
Original quantity quantity demanded
Step 2:
Original price — New Price X 100 = Percentage change in
Original Price price
Step 3:
Percentage change in quantity demanded = ELASTICITY
Percentage change in price
IF the ELASTICITY number is greater than 1, demand is elastic.
IF the ELASTICITY number is less than 1, demand is inelastic.
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Total Revenue Test
• Total Revenue is price times quantity demanded.
• The Total Revenue Test: One way to determine price elasticity of demand is to examine what happens to total revenue when the price for a product changes.
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IF….Price Total Revenue
Elasticity of Demand
UP Down Elastic
Down Up Elastic
Up Up Inelastic
Down Down Inelastic
Up or Down Equal Unit Elastic
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Let’s try some Examples!
Price rises from $5 to $6. Quantity demanded decreases from 15 to 10.• Old price x old quantity demanded = old total revenue
________x __________ = ___________
• New price x new quantity demanded =new total revenue
________x __________ = ___________
Price goes _______and total revenue goes _____ so demand is __________
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Example #2
Price falls from $10 to $8. Quantity demanded increases from 12 to 16.• Old price x old quantity demanded = old total revenue
________x __________ = ___________
• New price x new quantity demanded =new total revenue
________x __________ = ___________
Price goes _______and total revenue goes _____ so demand is __________
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FINALLY WE ARE DONE WITH DEMAND!