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DEMAND

DEMAND. “How Markets Work”. What is Demand?. Ferrari F-430 Retail: $ 350,000. Rolex Crown Collection Retail: $ 64, 500. Chloe Platinum 2ct Eternity Ring $ 5,629.73. ISA Ancona Yacht List: $14,500,000. Lamborghini Gallardo Retail: $310,000. Does WANT = DEMAND?.

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DEMAND

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  1. DEMAND “How Markets Work”

  2. What is Demand? Ferrari F-430 Retail: $ 350,000 Rolex Crown Collection Retail: $ 64, 500 Chloe Platinum 2ct Eternity Ring $ 5,629.73 ISA Ancona Yacht List: $14,500,000 Lamborghini Gallardo Retail: $310,000

  3. Does WANT = DEMAND? Three Criteria have to be met: • Desire • Ability • Willingness Demand = the desire, ability, and willingness to purchase goods and services (G/S). The AMOUNT consumers will BUY @ various PRICES!

  4. The LAW of DEMAND • Ceteris paribus, as prices rise, the QUANTITY DEMANDED falls. Vice versa • Ceteris paribus, as prices fall, the QUANTITY DEMANDED increases.

  5. Three Reasons for the Law of Demand We call these the: Income Effect Substitution Effect Diminishing Marginal Utility

  6. INCOME EFFECT • As prices go down, consumers “real’ income goes up! They can buy more with each dollar. • As prices go up, consumers “real” income goes down! They can buy less with each dollar. P I P I

  7. SUBSTITUTION EFFECT • As the price for a good or service increases, consumers will substitute another good or service that is cheaper.

  8. DIMINISHING MARGINAL UTILITY • As we buy more and more of a good our level of satisfaction (utility) diminishes. • We will not continue to buy more unless the seller lowers the price. • BOGO HALF OFF

  9. Demand Schedule • A TABLE showing the amount that will be purchased at various prices. Price Quantity $1.00 10 $2.00 5 $3.00 2

  10. Demand Curve A GRAPH that shows the AMOUNT that will be purchased at VARIOUS PRICES. Price of Ice-Cream Cone $3.00 2.50 2.00 1.50 1.00 0.50 Quantity of Ice-Cream Cones 0 1 2 3 4 5 6 7 8 9 10 11 12

  11. Price Elasticity of Demand • Demand elasticity:A measure of how much the quantity demanded of a good responds to a change in the price of that good. • Demand is elastic if the quantity consumers buy changes substantially when the price of the good changes • Demand is inelastic if the quantity demanded changes proportionately less than the change in price.

  12. Determinants of Price Elasticity of Demand Demand tends to be more elastic : Demand tends to be more inelastic: If the good is a necessity The shorter the time period. The smaller the number of close substitutes. The more largely defined the market. • If the good is a luxury. • The longer the time period. • The larger the number of close substitutes. • The more narrowly defined the market

  13. $5 1. A 22% increase in price... 4 Demand 50 100 2. ...leads to a 67% decrease in quantity. Elastic Demand Price An elastic demand curve is fairly flat – showing small changes in prices cause large changes in quantity demanded Quantity

  14. $5 1. A 22% increase in price... 4 Demand 90 100 2. ...leads to a 11% decrease in quantity. Inelastic Demand Price An inelastic demand curve is fairly steep – showing changes in prices lead to smaller changes in quantity demanded Quantity

  15. A Price (P) P1 rQD B P2 D1 0 0 Q1 Q2 Quantity Demanded (QD) Changes in QUANTITYDemanded… • A change inQUANTITY DEMANDED means consumers are BUYING MORE OR LESS because of a CHANGE IN PRICES. • A change inQUANTITYDEMANDED is demonstrated by MOVEMENT ALONG a demand curve caused by a CHANGE IN PRICE

  16. What causes achange in quantity demanded? A change in price.

  17. The LAW of DEMAND • CETERIS PARIBUS, as prices rise, the quantity demanded falls and vice versa along a constant demand curve. CETERIS PARIBUS means “While one thing changes (price),everything else remains the same.”

  18. Will you never be willing or able to buy this car?

  19. IS DEMAND… CONSTANT??? NO

  20. rD Changes in DEMAND • A Change in Demand means: • Consumers purchase more or less products at EVERY PRICE LEVEL causing a change in the demand schedule and a shift of the curve. Price (P) P 2 P 1 D1 D2 D3 0 0 Quantity Demanded (QD)

  21. Changes in DEMAND • Demand changes when something other than price changes the market conditions. • Non-price Determinants of Demand • Income of Consumers • Number of Buyers (population changes) • Expectations of Prices or Income in the Future • Prices of Related Goods (Substitute goods or Complementary goods) • Tastes & Preferences of Consumers

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