Law of Demand - PowerPoint

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Law of Demand - PowerPoint Powered By Docstoc
					Demand: How we decide what we buy.

Concept of Demand is based on 3 key
1. People Economize

2. People respond to incentives in predictable
3. All choices involve costs
   The desire to own something and the ability
    to pay for it.
   Both of these conditions must be present in
    order to have a demand for a good or service
       Example:
           You may want a new computer or a car, but it you
            can’t truly afford it, then you do not demand these
Law of Demand
   When a good’s price is lower, consumers will buy
    more of it.
       When prices decline, the anticipated benefited does not
        change, but the value of the next best alternative
        (opportunity cost) decreases
   When the price is higher, consumers will buy less of
       When prices increase, the anticipated benefit does not
        change, but the value of the next best alternative
        (opportunity cost) increases
   We all are acting out this law with every purchase
    we make.
Substitution Effect and Income Effect
   The law of demand is the result of 2 separate
       Substitution Effect:
           The consumer reacts to a rise in the price of one good
            by consuming less of that good and more of a
            substituted good
       Income Effect:
           The change in consumption that results when a price
            increase causes real income to decline
Example of Substitution Effect and
Income Effect
   You love pizza.
   You would buy a slice for lunch if it costs $2.00.
   Most wouldn’t buy a slice if the price was raised to
    $10.00 a slice.
   As the price of pizza rises, consumers have an
    incentive to buy an alternative (salad, taco,
    sandwich) as a substitute for pizza – Substitution
   When the price of pizza increases, you won’t buy as
    much as you had in the past, resulting in more
    money in your pocket– Income effect
          Auction Activity
   Item 1 up for auction:
       Highest bidder gets 2 homework freebies.

   To win this item…YOU MUST GIVE ME
            Auction 1 questions
1.   Why might you choose not to bid on the
2.   What factors make you bid and determine
     how much you decided to bid?
3.   Once a price is established in a market, do
     you think its stays the same for a long period
     of time?
                Auction Item 2
   Highest bidder is free from coming to class
    for the rest of the semester, will get a 100 for
    the quarter, and will get a 100 as the final
    exam grade.

    IN 2 DAYS
            Auction 2 questions
   How did your bidding decision change now
    that the item changed and you had the ability
    to use an IOU?
   Why do you think your decision changed?
What do you think may determine or affect the
demand of a specific product or service?
       Determinants of Demand
Consumers are influenced by many outside
   factors and so their demand for a given
   product is based on…
     Income
     Taste
     Price of goods
     Expectations
     Number of buyers
Demand Curves
   Slope downward from
    upper left to lower
    right of graph
   X Axis- Quantity
    demanded, Y Axis-
   Use to determine the
    quantity demanded of a
    good at any given price
Example of Demand Schedule and
Price per   Quantity
Pizza       Demanded                                Demand Curve for Pizza
            per Week
            (in                            14
                         Price per Pizza
$15         8                               8
12          14                              6
9           20                                                                             D¹
6           26                              0
3           32                                  0   5     10    15     20     25      30   35
                                                        Thousands of pizza per week
Why do people demand more goods and services
at lower prices and fewer at higher prices?
Law of Marginal Utility
   The marginal benefit from using each
    additional unit of a good or service during a
    given period of time will decline
       Because consumers receive less satisfaction from
        each addition item, they will not pay as much for
        additional purchases
Why do businesses put items on sale?
   They are attempting to predict consumer
       They are predicting that the number of products
        bought will increase at lower prices
   It is NOT to increase consumer demand
    because a change in price can only cause a
Changes in Demand
   Changes in quantity demanded caused by
    changes in price
   Changes in demand caused by changes in
       One’s income
       The size of the market
       Consumer tastes
       Consumer expectations
       Availability, quality, or price of substitutes
       Use of a complementary good
   Increased income causes an increase in
   Decreased income means consumers can buy
    less and causes a decrease in demand
   Ex) During the recession, the demand for
    luxuries like sports cars has decreased (sports
    cars are normal goods)
   Other examples?
Market Size
   A growing market usually increases demand
   A shrinking market usually decreases demand
   Ex) Demand for lobster in Cape Cod
    increases during the summer when there are
    more tourists
   Other examples?
Consumer Tastes
   The demand for goods and services increase
    with popularity
   When popularity decreases, so does the
    demand of the good
   Ex) After Oprah endorses a book, its sales
   Other examples?
Consumer Expectations
   When consumers expect prices to increase in the
    future for a certain good, demand for it increases
   When consumers expect prices to decrease in the
    future for a certain good, demand for it decreases
   Ex) Current demand for Gap jeans decrease because
    customers know they will be half-priced in
   Other examples?
Substitute Goods
   Decreased price of a substitute good will cause
    decreased demand for the original good
   Increased price of a substitute good will cause an
    increased demand for the original good
   Change in price of original good affects the demand
    for the substitute goods
   Ex) Cab fares in Boston rise and so demand for the T
   Other examples?
Complementary Goods
   When the demand for a good increases, the demand
    for its complement goods will increase
   When the demand for a good decreases, the demand
    for its complement goods will decrease
   Ex) When the demand for turkey increases, the
    demand for stuffing does too
   Other examples?
Identifying Factors Affecting Demand
   For each example of a change in demand identify
    what factor affected it
       Electric scooter sales fall and bike sales rise
       The cost of aluminum alloy bike frames is about to rise;
        consumers buy bikes now
       Using a folding bicycle becomes a fad among commuters.
        Sales of this this type of bike boom
       The US birth rate declined for 10 years in a row,
        eventually causing a drop in sales of children's’ bikes
       The demand for bikes has increased over the past few
        years during the recession
       Bicycle sales are on the rise, and so are the sales of
Increases or decreases in demand?
   Snuggies- Miley Cyrus wears one at a
    concert, making them even more popular
   Red Bull- Prices of coffee soar after a world-
    wide strike by coffee workers hoping for fair
   Health Care- The elderly population of
    Florida soars with the return of “snow birds”
   Private School Education- Many investment
    bankers are laid during the recession
Changes in Quantity Demanded
   Decrease in demand       Increase in demand
    causes a shift of         causes a shift of the
    demand curve to the       demand curve to the
    LEFT                      RIGHT
Change in Quantity Demanded vs.
Change in Demand
   Change in quantity demanded caused by
    changes in …
   Changes in demand caused by …

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