Chapter 4 - Demand Maybach Exelero
Section 1 – Understanding Demand
Demand The desire to own something and the ability to pay for it.
Law of Demand consumers buy more of a good when its price decreases and less when its price increases.
Substitution Effect • occurs when consumers react to an increase in a good’s price by consuming less of that good and more of other goods.
The Income Effect • The change in consumption resulting from a change in income
The Demand Schedule • A demand schedule is a • A market demand schedule is table that lists the a table that lists the quantity of quantity of a good a a good all consumers in a person will buy at each market will buy at each different different price. price. Demand Schedules Individual Demand Schedule Market Demand Schedule Price of a Quantity demanded Price of a Quantity demanded slice of pizza per day slice of pizza per day $.50 5 $.50 300 $1.00 4 $1.00 250 $1.50 3 $1.50 200 $2.00 2 $2.00 150 $2.50 1 $2.50 100 $3.00 0 $3.00 50
Demand Curve • a graphical Market Demand Curve representation of a demand 3.00 Price per slice (in dollars) schedule. 2.50 2.00 • When reading a 1.50 demand curve, 1.00 assume all Demand .50 outside factors, 0 50 100 150 200 250 300 350 0 such as income, Slices of pizza per day are held constant.
Section 2 – Shifts of the Demand Curve
Shifts in Demand • Ceteris paribus • A demand curve is accurate only as long as the ceteris paribus assumption is true. • When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve the entire demand curve shifts.
What Causes a Shift in Demand?
1. Income • Changes in consumers incomes affect demand.
• normal good - a good that consumers demand more of when their incomes increase.
• Inferior good - a good that consumers demand less of when their income increases.
2. Consumer Expectations • Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good today.
Bicycle Example
Bicycle Example Scenario #1
Bicycle Example Scenario #2
3. Population • Changes in the size of the population also affects the demand for most products.
4. Consumer Tastes and Advertising • Why do fads begin? Is it because of advertising, campaigns, social trends, television shows, combination of all of it?
1950’s Fashion Trend: Poodle Skirt
1950’s Fashion Trend: Cat's Eye glasses
Other Fashion Trends: 1950’s • Peter pan collared shirts • Saddle Shoes • Hawaiian shirts • Letterman jackets • White Tshirts • Blue Jeans (deep cuffs) • Beatniks (all black) • Circle skirts Beatnik
1960’s Fashion Trends: Tie-dye
1960’s Fashion Trends: Nehru Jackets
Other Fashion Trends: 1960’s • Miniskirts • Go-go boots • Pill box hats • Hotpants • Shift dress • 3/4 length sleeves
1970’s Fashion Trends: Earth Shoes
1970’s Fashion Trends: Bell-bottoms
Other Fashion Trends: 1970’s • Track suits • Mood rings • Earth shoes • Platform shoes • Leisure suits • Disco/glam rock • Printed nylon or polyester shirts • Corduroy
1980’s Fashion Trend: Polo shirts
1980’s Fashion Trend: Acid-wash jeans
Other Fashion Trends: 1980’s • Designer jeans • Flashdance: leg- warmers, ripped sweatshirts • Big shoulder pads • Punk • Parachute pants
1990’s Trend: Grunge music
1990’s Fashion Trend: Power bead bracelets
90’s Fad : Furby
Other Trends: 1990’s • Long, straight hair parted down the middle • Pashminas (type of scarves ) • Tattoos • Minimalistic designs • Baggy jeans
Trends of the 2000’s: Flare Jeans
Trends of the 2000’s: Geocaching
Trends of the 2000’s: Razor Scooters
Other General Trends: 2000’s • Fantasy Leagues • High School Musical • Robotic Pets • YouTube • Hannah Montana • TV/ DVD screens in cars • Mini skirts with leggings • Hybrid cars • Skinny jeans • Oversized sunglasses • Ipods • Using online slang in speech • Crocs • American Idol • Gameboy Advance • Emo Music & Style • PS2 – PS3 • Craigslist • Colored Jeans • Soulja Boy • World of Warcraft • DeGrassi • Facebook • Family Guy • Heelys • That 70s Show • The Chappell Show • Silly Bands • Internet Dating • XBOX
• Changes in tastes and preferences cannot be explained by changes in income or population
Prices of Related Goods The demand curve for one good can be affected by a change in the demand for another good. • Complements are • Substitutes are two goods that are goods used in place bought and used of one another. together. Example: Example: skis and skis and ski boots snowboards
Chapter 4 – Section 3 Calculating Elasticity of Demand
Elasticity of Demand a measure of how consumers react to a change in price.
Elasticity • Describes demand for a good that is very sensitive to changes in price is elastic.
Examples of Elastic Goods:
Examples of Elastic Goods:
Examples of Elastic Goods:
Examples of Elastic Goods:
Inelasticity • Demand for a good that consumers will continue to buy despite a price increase
Examples of Inelastic Goods
Examples of Inelastic Goods
Examples of Inelastic Goods
Calculating Elasticity Elasticity of Demand Elasticity is determined using the following formula: Percentage change in quantity demanded Elasticity = Percentage change in price To find the percentage change in quantity demanded or price, use the following formula: subtract the new number from the original number, and divide the result by the original number. Ignore any negative signs, and multiply by 100 to convert this number to a percentage: Original number – New number Percentage change = x 100 Original number
Elastic Demand Elastic Demand If demand is elastic, a small change in price leads to a relatively large change in the quantity $7 demanded. Follow this demand curve from left to right. $6 $4 – $3 The price decreases from $4 to $3, a decrease x 100 = 25 $5 of 25 percent. $4 Price $4 10 – 20 The quantity demanded increases from 10 x 100 = 100 $3 Demand to 20. This is an increase of 100 percent. 10 $2 $1 Elasticity of demand is equal to 4.0. 100% Elasticity is greater than 1, so demand is = 4.0 elastic. In this example, a small decrease 25% in price caused a large increase in the 0 5 10 15 20 25 30 quantity demanded. Quantity
Inelastic Demand Inelastic Demand If demand is inelastic, consumers are not very responsive to changes in price. A decrease in $7 price will lead to only a small change in quantity demanded, or perhaps no change at all. Follow $6 this demand curve from left to right as the price decreases sharply from $6 to $2. $5 Price $6 – $2 $4 The price decreases from $6 to $2, a decrease x 100 = 67 of about 67 percent. $6 $3 10 – 15 Demand The quantity demanded increases from 10 x 100 = 50 $2 to 15, an increase of 50 percent. 10 $1 Elasticity of demand is about 0.75. The 50% elasticity is less than 1, so demand for this = 0.75 good is inelastic. The increase in quantity 0 67% 5 10 15 20 25 30 demanded is small compared to the Quantity decrease in price.
Unitary Elasticity: • the percentage change in quantity demanded is exactly equal to the percentage change in the price.
Factors Affecting Elasticity: 1. Availability of Substitutes
Factors Affecting Elasticity: 2. Relative Importance (how much of your budget you spend on the good.)
Factors Affecting Elasticity: 3. Necessities versus Luxuries
Factors Affecting Elasticity: 4. Change over Time (people can eventually find substitutes.)
Elasticity and Revenue • The elasticity of demand determines how a change in prices will affect a firm’s total revenue or income. • A company’s total revenue is the total amount of money the company receives from selling its goods or services.
CH 4 Review Questions Give an example of how a consumer’s expectation that price will go 1. down in the future can affect his or her desire to buy something today. Does this always have the same effect on present buying patterns? 2. How does the budget percentage that a person spends on a certain good affect the elasticity of demand for that good? Give a specific example. 3. How can a change in population cause a change in the type of clothing that is in demand? 4. What is the difference between a change in quantity demanded and a shift in the demand curve? 5. Give an example of a good or service that may change in elasticity over time rather than immediately, and discuss why this happens. 6. What role can advertising play in a shift in demand? Give a specific example.
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