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Demand and Price Effect in Economics

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  1. DEMAND Chapter 4

  2. I. Demand and the Price Effect • Demand (pg 85) Quantity of good or service people are WILLING and ABLE to buy at any given price • Law of Demand (pg 85) Consumers will buy more of G &S at lower prices, and less at higher prices

  3. 2 (3) ‘Patterns’ or reasons for the Law of Demand, aka The Price Effect • Substitution Effect (pg 87) Consumers react to price changes due to availability of substitutes • Income Effect (pg 87) Change in consumption due to the effect spending has on real income

  4. But WAIT! There’s more! A third reason for the price effect (NOT in the book)… • Law of Diminishing Marginal Utility Point reached when the next item consumed is less satisfying – too much stuff! *Utility: Satisfaction

  5. C. Individual D versus Market D • Individual: what you are willing and able to pay • Market: what a community/society/group is willing and able to pay

  6. D. Schedules and Curves • Schedule: a chart that shows the relationship between price and quantity (see page 89) • Curve: a graph that shows the relationship between price and quantity (see page 90)

  7. Looking at Curves • Graph that shows all the price/quantity combinations • Curve slopes down and to the right • Demand is an entire curve – NOT just one point on a curve!

  8. The WHOLE Line! All points! $60 P NOT a Single Point! $10 1 Q 6

  9. II. Change in Demand • Demand Curves will ‘shift’ up or down depending on the following factors: • Change in income • Income rises, people can spend more money and vice-versa (income effect)

  10. Price and availability of substitutes • Change in one thing effects its substitutes • Price/availability of Complementary goods • Things used together effect each other

  11. Change in Weather or Season • Change in weather effects demand for certain things • Change in the number of buyers • Population changes effects demand • Change in styles, tastes or habits • Fads and fashion

  12. Change in expectations • Future predictions effect demand

  13. III. Price Elasticity • Elasticity of Demand • Measurement of the impact of the price effect • Shows buyer’s eagerness to buy a product

  14. If effect is large, the demand is elastic • If effect is small, the demand is inelastic • In other words… • Some products people will stop buying even when there is a small change in the price effect (elastic) • The reverse is inelastic…

  15. Elasticity is different for various goods because • Availability of Substitutes (more available, more elastic) • Percentage of budget (higher % of budget, the more elastic) • Time (the longer people have to adjust, the more elastic) • Luxury vs. Necessity

  16. Elastic Products… Coca Cola

  17. Inelastic Products… Energy Sources… Medical Services

  18. Elastic Graph $60 P $10 1 Q 6

  19. Inelastic Graph $60 P $10 1 Q 6

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