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Prices

Prices . Money price - The monetary price of a good or service at any point in time. Relative price - The price of any commodity in terms of another commodity. Bartering +. What is Demand?. Demand .

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Prices

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  1. Prices • Money price- The monetary price of a good or service at any point in time. • Relative price- The price of any commodity in terms of another commodity. • Bartering • +

  2. What is Demand?

  3. Demand • Quantities of a specific good or service that individuals, singularly or as a group, will purchase at various prices, all else being equal (ceteris paribus). • In order to truly demand a good you must be able to afford it.

  4. The Law of Demand • When the price of a good increases, people will buy less of that good, all else being equal (ceteris paribus). When the price of a good goes down, people will buy more of that good, ceteris paribus. • There is an inverse relationship between P and Qd

  5. Behavioral Effects • Substitution Effect- consumers react to a rise in the relative price of one good, by consuming less of that good and more of a substitute good (the opposite is true as well). • Income Effect- As the price of a good increases, the quantity of that good demanded decreases. (the opposite it also true) • Feel poorer and lose of purchasing power

  6. Demand Schedule • A table that represents the relationship between the price of a good or service and the quantity demanded

  7. Demand Curve • The demand curve is created by plotting the points from a demand schedule. • The demand curve always has a negative slope (downward sloping) due to the Law of Diminishing Marginal Returns (we will get to this later). • Demand goes D-D-D-Down

  8. Demand Curve

  9. Market Demand • The sum of individual quantities demanded by all buyers in a market for a particular good or service. • Market demand is one factor used to determine market price

  10. Individual Vs. Market Demand

  11. The Demand Curve is not Static!

  12. Shifts in Demand • Suppose Dr. Dre gives every college student a free pair beats headphones. • How does this effect the demand for ipods? (ceteris paribus of course)

  13. Shifts in Demand • How is the demand for Bose headphones affected?

  14. Determinants of Demand • Income- Typically as income rises so does D • Normal goods- Goods for which D rises when consumer income increases. • Inferior goods- Goods for which D falls when consumer income increases.

  15. Determinants of Demand • Market size (number of buyers) – Change in the number of consumers shifts demand • Change in population…

  16. Determinants of Demand • Expectations – Consumers expectations regarding future relative prices.

  17. Determinants of Demand • Prices of Related Goods – Goods for which demands are interdependent • Substitute goods- Goods that can be consumed to satisfy the same basic want

  18. Price of Related goods • Complimentary Goods- goods that are typically consumed together • For example: socks and shoes *Not to be confused with socks and Sandals.*

  19. Determinants of Demand • Tastes and Preferences– A change in consumer tastes and preferences can shift the demand curve

  20. I.N.E.P.T. • Income • Number of Buyers (market size) • Expectations • Price of Related Goods • Tastes and Preferences

  21. Quantity Demanded (Qd) • How much of a good is demanded at a specific P • A change in P changes the Qd! (ceteris paribus) • Movement along the D curve changes the Qd

  22. Elasticity of Demand • Dictates how drastically buyers will cut back or increase their demand for a good or service when the price rises or falls, respectively. • Helps us measure how consumers respond to price changes in different goods and services.

  23. Imagine if suppliers could charge for water. What would happen?

  24. Elasticity of Demand • Inelastic- relatively unresponsive to price changes. (<1) • Elastic- even a small price increase results in an drop in demand, people will buy less (>1) • Unitary elastic- elasticity is equal to 1

  25. Calculating Elasticity • Elasticity = % change in Qd % change in P • Percentage change (Δ) = Original # - New # Original # • The answer will always be negative, due to the law of demand. For simplicity sake we just drop the negative sign. • Example: $4-3 and 10-20, $6-2 and 10-15 X100

  26. Factors Affecting Elasticity • Availability of substitutes • Concert tickets, medicine • Relative Importance • % of budget, you pay closer attention • Necessities Versus Luxuries • Change over time • Adjust to changes in price; gas prices

  27. Elasticity and Pricing • Firms need to know whether their product is elastic or inelastic as a given price in order to maximize revenue.

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