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21.1 Demand and 21.2 Factors Affecting Demand

21.1 Demand and 21.2 Factors Affecting Demand. An Introduction to Demand. Demand is the desire, willingness, and ability to buy a good or service; consumers must want the good, be willing to pay, and have the resources to buy it

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21.1 Demand and 21.2 Factors Affecting Demand

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  1. 21.1 Demand and 21.2 Factors Affecting Demand

  2. An Introduction to Demand • Demand is the desire, willingness, and ability to buy a good or service; consumers must want the good, be willing to pay, and have the resources to buy it • A demand schedule is a table that lists quantities of a product or service someone is willing to buy over a range of prices

  3. An Introduction to Demand • A demand curve is a graph that shows the amount of a product that would be bought at all possible prices • Prices are on the vertical axis and quantity is shown on the horizontal axis; each point on the curve shows units sold at each price

  4. An Introduction to Demand • Demand curves usually slope downward because people normally buy less of a product if the price is high and more if the price is low • According to the law of demand, quantity demanded and price move in opposite directions

  5. Market Demand • Companies are interested in market demand- the total demand of all consumers for their product or service, not individual demand • Utility is the pleasure, usefulness, or satisfaction we get from using a product; satisfaction usually changes as we consume more of a product • Ex: The first piece of pizza is AMAZING, the tenth piece is just okay.

  6. Market Demand • Marginal utility is the additional satisfaction or use that is derived from each new unit acquired • Diminishing marginal utility is the principle that our additional satisfaction, or marginal utility tends to go down as more units are consumed

  7. Market Demand • If extra benefits (marginal utility) gained are greater than the marginal costs (money paid) we make the purchase; otherwise we keep our money • When the demand curve slopes downward it tells us we would be willing to pay the highest price for the first unit we consume, a slightly lower price for the next, an even lower price for the third, and so on

  8. Changes in Demand • When demand goes down people are willing to buy fewer items at all possible prices; in this case demand shifts to the leftLOWERS • When demand goes up, people are willing to buy more of the same item at any given price; this pushes the demand curve to the rightRAISES

  9. Changes in Demand What determines demand? • Changes in Population= demand is related to the number of consumers in an area, more people means higher demand • Changes in Income= demand changes when consumers’ incomes change; when people have more money they usually spend more • Changes in Tastes= changing tastes and popularity of a product can affect demand • Changes in Expectations= refers to the way people think about the future; they can force demand higher or lower

  10. Changes in Demand • Demand is also affected by the prices of related goods; there are two types of related goods substitutes and complements • Substitutes are items consumers can use in place of one another; a change in price of one causes demand for the other to move in the same direction Coffee and Tea are SUBSTITUTES; if the price of coffee goes UP, demand for tea goes UP

  11. Changes in Demand • Complements are products that can be used together; the demand for one moves in the opposite direction as the price of the other • The only factor that can directly cause a change in the quantity of a good is a change in its price; if the price of coffee goes up demand will fall Computers and Software are COMPLEMENTS; if the price for computers goes UP, demand for software goes DOWN

  12. Elasticity of Demand • The law of demand states that price and quantity demanded move in opposite directions; if price goes up demand goes down • Demand elasticity is the extent to which a change in price causes a change in quantity demanded Price goes UP Demand goes DOWN Price goes DOWN Demand goes UP

  13. Elasticity of Demand • If demand is elastic it means a change in price causes a large percentage of change in quantity demanded; demand can be elastic if there are attractive substitutes, if the item is expensive, or the purchase can be postponed • If demand is inelastic it means a change in price has little effect on the quantity demanded; demand can be inelastic if there are few or no substitutes

  14. Elasticity of Demand • Demand for medicine and food is inelastic because these are necessities which are goods needed in order to survive; demand for luxuries is elastic because buyers are more able to cut back on quantity demanded

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