Demand!

Standards SSEF4 The student will compare and contrast different

economic systems and explain how they answer the three basic economic questions of what to produce, how to produce, and for whom to produce.

SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy.

a. Define the Law of Supply and the Law of Demand.

b. Describe the role of buyers and sellers in determining market clearing price.

c. Illustrate on a graph how supply and demand determine equilibrium price and quantity.

d. Explain how prices serve as incentives in a market economy.

Standards SSEMI3 The student will explain

how markets, prices, and competition influence economic behavior.

a. Identify and illustrate on a graph factors that cause changes in market supply and demand.

Market Economy Circular Flow shows that businesses

use factors of production bought from Households to create goods or provide services.

How do they know which goods to produce or services to provide?

They study the market: • what’s selling• how much it’s selling for, and • how much of it is selling

What’s demand? Law of Demand

• States that the quantity demanded of a ood or services varies inversely (opposite) with its price.

(In other words, when the prices goes up, quantity demanded goes down. When price goes down, quantity demanded goes up.)

“Law” means it’s proven over & over in study after study.

Prices act as obstacles – Is it true in your life?

What’s demand? The desire, ability and willingness to

buy a product. For it to create a demand, all 3 factors have to be true.

Individual Demand Schedule

Market Demand Schedule

Why does demand curve slope downward?

Remember utility? Remember marginal? Marginal utility is the extra usefulness or

satisfaction a person gets from acquiring or using 1 more unit of a product.

Principle of diminishing marginal utility:• Extra satisfaction we get from using additional

quantities of the product begins to diminish.• We don’t get as much joy, pleasure, or usefulness for

the 2nd, 3rd, 4th, etc., of the same product, so we won’t pay as much for the 2nd, 3rd, 4th, etc., of the product as we did the first one we bought.

What has changed on our demand curve?

Price is the only thing that has changed.

Let’s look at another graph.

What could cause demand to change?

Change in number of consumer in the market for the product.• If number of consumers in the market for a

product increases, demand for the product will increase. Example: A fast food restaurant is built in the same block as a high school. The demand for fast-food restaurant’s products will increase. When the school closes for summer vacation, the demand for the fast-food products will decrease.

What else will change demand?

Change in consumer tastes and preferences for a product• Ex: If fashion magazines are showing short

skirts, the demand for short skirts will increase. If fashion magazines show few pictures of short skirts, demand for short skirts will decrease.

What else will cause demand to change?

Change in consumer income• If consumer income increases, demand for most

goods and services will increase. Income decreases, demand for most goods and services will decrease.

• Example: Workers at Beech Island sign a contract that will give them a 5% increase in wages. These workers will have more income and demand for goods and services will increase.

• Example: Social Security taxes increase resulting in less take-home pay for consumers. Demand for goods and services will decrase.

Demand Shifters Change in price of related goods –

complements• A change in the price of one good can

change the demand for another good.• One type of related goods is complements

--- goods that are purchased together. Strawberries and whipped cream Hamburgers and hamburger buns

Demand Shifters Change in the price of related goods

– substitutes• A change in the price of one good can

change the demand for another good. One type of related goods is substitutes – goods that are bought in place of other goods.

• Price of movie tickets increases, the demand for video rentals may increase. Price of Hamburger Heaven’s hamburgers

decreases, the demand for Big Burger’s hamburgers may decrease.