DEMAND Defined:

Demand: In economic terms, demand is the amount of a good or service that a consumer is willing and able to buy at all the various possible prices during a given time period.

When represented graphically, DEMAND is the whole curve itself

Quantity Demanded

Quantity Demanded: the amount of a good or service that a consumer is willing and able to buy at each particular price point during a given time period.

When represented graphically, QUANTITY DEMANDED is the individual points on the curve

THE DEMAND CURVE

The Demand Curve ALWAYS slopes this way

The Law of Demand

Law of Demand: states that 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.

In a free-enterprise system, price is the main variable affecting Quantity demanded.

Purchasing Power

Purchasing Power: the amount of money, or income, that people have available to spend on goods and services.

Usually, as one’s purchasing power increases, their Demand will increase for a particular good/service as well.

Determinants of Demand

Determinants of Demand: Factors, OTHER THAN PRICE, that create more or less demand for a product or service.

These will shift the entire demand curve to the Left (less demand) or the Right (more demand).

***A price change will only change the Quantity Demanded***

Determinants of Demand

Consumer Tastes Ex. Bands, endorsements, “Going

Green” Number of Consumers (market size)

Embargos, New Technology can create new markets while hurting others. (Cell phones - Landline)

Determinants of Demand

Income More $ = More likelihood of spending

(Beef vs. Steak Problem) Consumer Expectations

(Expecting a Raise, predicting future prices)

Prices of Related goods Substitute & Complimentary

Price of Related Goods

Substitute Goods – A consumers tendency to switch to a lower priced, but similar product. (Butter vs. Margarine)

Complementary goods – Goods that are commonly used with other goods (Peanut Butter & Jelly)

***Only 1 market will experience a Demand curve shift…..the other experiences a price change or Quantity Demanded

Practice

In groups of 2-3, imagine that you are the officers of a school club…..To raise money for your club, you are selling tickets to a dance. Your task is to think of ways to increase ticket sales without lowering the ticket prices…..

Come up with as many ideas as you can think of for ALL FIVE DETERMINATES OF DEMAND to shift the Demand Curve for dance tickets to the Right - - - - - - - - - - - - - >

Elasticity of Demand

Elastic Demand - When a small change in price GREATLY Changes the Quantity Demanded The Demand Curve looks almost

horizontal These goods are Not Necessities These goods have many substitutes

Elasticity of Demand

Inelastic Demand - When a change in price causes LITTLE or NO change in Quantity Demanded The Demand Curve looks almost Vertical

These goods are more need based These goods have few/no substitutes These goods are very cheap (Salt or Soap)

Price Elasticity of Demand

PEoD = (%Change in Quantity Demanded)/(%Change in Price)

To Calculate %Change in Quantity Demanded: [Qdemand(new) - Qdemand(old)] / Qdemand(old)

To Calculate %Change in Price: [Price(new) - Price(old)] / Price (old)

Price Elasticity deals in Absolute Values

Price Elasticity Practice

Consider the following figures. Price Quantity Demanded $9 150 $10 110What is the Price Elasticity of this Product?

Price Elasticity of Demand PEoD =

(%Change in Quantity Demanded)/(%Change in Price) To Calculate %Change in Quantity Demanded:

[Qdemand(new) - Qdemand(old)] / Qdemand(old) To Calculate %Change in Price:

[Price(new) - Price(old)] / Price (old)

=============================Step 1: [110 - 150 = -40] / 150 = .26667Step 2: [10 - 9 = 1] / 9 = .1111Step 3: (-.26667) / (.1111) = -2.4005Answer: 2.4005 is the Elasticity of this good.

Price Elasticity of Demand * If PEoD > 1 then Demand is Price

Elastic (Demand is sensitive to price changes)

* If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)