DemandDemandSection 1

I want I want I wantI want I want I want

What is demand?

It is the desire, ability and willingness to buy a product

It is a microeconomic concept, which means:◦The part of economics that deals with behavior and

decisions making by SMALL units, such as individuals

◦ It helps to explain how prices are determined and decisions are made

So why should I know before?So why should I know before?

As consumers we are smarter when we research

As investors we are also smarter when we research

It is essential to understand how a market economy works ◦To know what is popular and not so much◦What people are charging◦Is there a need for the product, etc.

◦ It is important for sound business planning

Where is the demand!!!!

The more demand the better

You will not start a ski shop in Hawaii

Law of demandLaw of demand

States that the quantity of a good or service varies inversely to price

So in other words, price and quantity have an opposite relationship

So, when price goes up, demand goes downWhen price goes down, demand goes up

Price is an obstacle because it discourages people from buying or doing something

High prices are an obstacle

Its time to graph!!!Its time to graph!!!

A demand schedule, is a listing that shows various quantities demanded of a particular product at all possible prices that might prevail in a market at any time

It shows what an individual is willing to purchase

Most people would buy more of something as the price gets lower

Draw One

Market Demand ScheduleMarket Demand Schedule

Also a table but reflects how much of a good or a service all consumers are willing and able to buy at each price in the market

The CurveThe Curve

Demand curve, is the demand schedule shown graphically as a downward sloping line

It is a graph showing the quantity demanded at each and every price

It is represented as DDThe price is the Y or vertical side of the

graphThe demand for the product is the X or

horizontal side

Market Demand CurveMarket Demand Curve

This is a curve that shows the quantities demanded by everyone who is interested in purchasing the product

For our purposes in this class the market will be small

Shows the data found in a market demand schedule and shows the quantity that all consumers are willing to buy

Law of Diminishing Marginal Law of Diminishing Marginal UtilityUtility

Popularity of a product is based on utility, or useful or satisfaction that someone gets from using the product

Diminishing marginal utility, the extra satisfaction someone gets from the product starts to diminish or go away

We are not likely to purchase some things for a 2nd, 3rd or 4th time

Types of demand changesTypes of demand changes

When the price of something goes up you buy less of it because you feel poorer

This is called the income effect, there is a change in quantity demanded because of a change in price that alters consumers’ income

So what is the next option?So what is the next option?

Well, many people may buy a Bon Jovi CD or song instead of a concert ticket because they can afford that

This is called the substitution effect, people substitute a lower priced item for another for instance generic name brands

Change in Quantity DemandedChange in Quantity Demanded

A change in the amount of a product that consumers will buy because of a change in price

Each change in quantity demanded is shown by a new point on the demand curve

Second type of changeSecond type of change

Change in demand causes a shift in the demand curve because people are now willing to buy different amounts of the product at the same price

Why the change? Depends, sometimes a change in consumers tastes’, income, price of related goods (substitutes and compliments), consumer expectations and market size

The more demanded the shift to the right, less shift to the left

Changes in ExpectationsChanges in Expectations

Bad weather?Terrorist attacks?

Section 2

What affects the way we What affects the way we purchase?purchase?

AdvertisingTrendsNew productsChanges in season

For example: healthier lifestyle, typewriter versus computer, fuel efficient cars, baseball season

Do I Buy? Do I need it?Do I Buy? Do I need it?

Elasticity of demand, refers to how responsive consumers are to a price changes in a marketplace

Fat PantsFat Pants

Sometimes demand is referred to as being elastic

It means a change in price causes a change in the quantity demanded (either up or down)

When demand is elastic you can see a relatively large change in demand

Ex. Fresh veggies

InelasticInelastic

Inelastic means a given change in price causes relatively small changes in demand

Ex. Salt, if the price is cut in half people are not going to run out and purchase large amounts of salt and vice versa

Other examples, doctors, tobacco, gas, alcohol

Test elasticityTest elasticity

PDA’s go on saleIf price goes down 20% and quantity

demanded goes up 30% , then the demand is elastic

Reason: the percentage change in the quantity demanded is greater than the percentage change in price

Unit ElasticUnit Elastic

The change in price and quantity demanded are the same

How do we determine a products How do we determine a products elasticity?elasticity?

1. urgency or need- can the purchase be delayed….is it a luxury or a necessities

Example would be insulin2. adequate substitutes available- if yes the

consumer can switch back and forth when prices change

3. does the purchase use large amounts of money?

Demand for salt is inelastic b/c a container is less than a $,a car would be different

Take a TestTake a Test

Total revenue is the amount of money a company receives for selling its products

Total revenue test- compare total revenue a business would receive when offering its product at various prices