Econ lecture on demand
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Transcript of Econ lecture on demand
T H E L AW O F D E M A N D
D E F I N I T I O N O F D E M A N D
• Being willing and able to purchase a good or service at a particular time and place at a given price.
• Varies inversely with price
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T H E B U Y E R ’ S T R A D E - O F F
• Think of this in terms of a trade-off that all people do in determining whether or not to become a buyer:
• If I choose to buy, then I get the benefit of what I purchased at the cost of what I could have purchased.
• We represent what you could have purchased with a price.
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L AW O F D E M A N D
• As the price rises, the quantity demanded falls
• Or, as the price falls, the quantity demanded rises.
• Ceteris Paribus “All things remaining constant.
• The demand curve downward slope shows the trade-off a buyer makes
W H Y T H E L AW W O R K S
• As the price of a good increases people are more willing to substitute other items. (Substitution Effect)
• People prefer lower costs if all things are equal.
M A R G I N A L U T I L I T Y• Think of the Demand curve like a Marginal Utility
curve:
• Buyers will continue to buy as long as the price they pay is less than the benefit they receive.
• Typically buying a good/service provides satisfaction/usefulness.
• However, as you continue to buy your satisfaction declines. This decline is know as Diminishing Marginal Utility
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S H I F T I N G D E M A N D
• When candy is sold, buyers wish to buy at as low a price as possible
• If we find out that candy enhances intellectual ability, we might find more people buying more stuff at a higher price: an increase in demand.
• If we find out that candy is poison, we would likely have the opposite effect.
S H I F T I N G D E M A N D
• We would also see more demand if we allowed people to buy on IOU’s
• Remember the definition of demand?
• Willing and Able to Buy
• If people increase their ability to buy (having more money, can buy on IOU’s) their demand goes up.
• If people increase their willingness to buy (candy makes you smart) their demand goes up also.
S H I F T I N G D E M A N D
• Six factors cause a shift in demand
• 1. Consumer Income
• 2. Future Expectations
• 3. Population of buyers
• 4. Consumer Tastes/Popularity
• 5. Price of Complementary Goods
• 6. Price of Substitute Goods
P R I C E E L A S T I C I T Y O F D E M A N D
• DEF: How consumers respond to a change in price of a good/service.
• Change in cost (price) can result in large changes to the Quantity Demanded
• Inelastic Demand is a small change in QD as a result of more modest changes to price
C A U S E O F E L A S T I C I T Y
• If you can switch to a substitute this creates market competition and can result in lower prices
• If an item is a large purchase item purchases are often delayed causing lower demand for them
• Necessity vs. Luxury = prioritizing needs over wants affects demand
• Time - Can it be a long term purchase