Demand- the desire to own something AND the ability to pay for it.

The Law of Demand

PRICE

GOES UP

DEMAND

GOES DOWN

AND….As price goes down, you demand more of something!

Substitution Effect- When the price of one good rises, you demand less of that good, and demand more of another good.

Income Effect- If you buy fewer of one good without buying other goods because of rising prices.

Demand Schedule- table that lists the quantity of a good that a person will purchase at each price.

A demand curve is accurate only as long as there are not changes other than price that could affect the consumer’s decision.

A store owner would choose what price and quantity combination from the list that would maximize profits, and produce that amount of goods.

Hold everything else constant.

0 1 2 3 4 5

0

.5

1

1

.5

2

2.5

3Change in quantity

demanded caused by a change in price is shown as a movement along a demand curve

Price

Quantity

CHANGE IN QUANTITY DEMANDED

0 1 2 3 4 5

0

.5

1

1

.5

2

2.5

3Price

Quantity

When we allow other factors to change, we no longer move along the demand curve, the ENTIRE demand curve shifts.

CHANGE IN DEMAND

Original Demand

New Demand

A change in the price of a good does not cause the demand curve to shift.

Income

Consumer Expectations

Consumer Tastes and Advertising

Population

A consumers income affects his or her demand for most goods.

Most items that are purchased are normal goods- goods that consumers demand more of when their incomes increase. Income increase from $50 to $75, buy

more normal goods at every price level Other goods are called inferior goods

(A good that consumers demand less of when their incomes increase)Generic cereal, used cars, used paperback

books.

Changes in the size of the population will also affect the demand for most products.

A rise in population will increase the demand for houses, food, and many other goods and services.

Over the next few decades, the market will face rising demand for the goods and services that are desired for senior citizensMedical care, recreational vehicles…

Our expectations about the future can affect our demand for certain goods today.

The current demand for a good is positively related to its expected future price. If you expect the price of a TV to rise, your

current demand will rise, which means you will buy the good sooner.

If you expect the price to drop, your current demand will fall and you will wait for the lower price.

Certain Fads

Clever advertising campaigns, social trends, the influence of TV shows… or combined.

CHANGES IN TASTES AND PREFERENCES

Hope to increase the demand for their product—increasing money spent on advertising.

The demand curve for one good can be affected by a change in the demand for another good.

Compliments- two goods that are bought and used togetherSkis and ski boots

Substitutes- goods used in place of one another.Skis and snowboards

When the price of skis go up, the demand for ski boots fall. (demand shifts left)

When the price of skis go down, the demand for ski boots rise. (demand shifts right)

When the price of skis go up, the demand for snowboards go up. (demand shifts right)

When the price of skis go down, the demand for snowboards go down. (demand shifts left)