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Consumers and Demand. The Law of Demand. Demand : The desire to own something and the ability to pay for it. The Law of Demand : Consumers buy more of a good or service when its price decreases and less when its price increases.
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The Law of Demand • Demand: The desire to own something and the ability to pay for it. • The Law of Demand: Consumers buy more of a good or service when its price decreases and less when its price increases. • It’s all about getting the most for your buck (e.g. the auction market)
Shifts in Demand • What causes a shift? • Income • Normal Goods (Income increases → Demand increases) • Inferior Goods (Income increases → Demand decreases) • Consumer Expectations (e.g. sales) • Population (e.g. baby boomers) • Consumer Tastes and Advertising
Consumer Tastes and Advertising • Food • Fashion • Entertainment • Personal Health • Toys • Clothing
Shifts in Demand (Cont’d) • As consumers earn more money, they are able to spend more. • Income effect: The change in consumption resulting from a change in income.
Shifts in Demand (Cont’d) • Goods used in place of one another (substitute products – e.g. sugar and Splenda). • Two goods that are brought and used together (complementary products – e.g. hot dogs and buns).
Elasticity of Demand • The degree to which changes in price cause changes in quantity demanded (Elastic vs. Inelastic). • Two Reasons for Elasticity of Demand: • The relationship between income and cost of the product (Car vs. Salt) • Whether or not a substitute is available (Butter vs. Margarine)