ECOGOV: 4.1 UNDERSTANDING DEMAND

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ECONOMICSMR. HOOD28 APRIL 2014

4.1 UNDERSTANDING DEMAND

ECONOMICSMR. HOOD`S NOTES28 APRIL 2014

34 SLIDES

OBJECTIVE 1EXPLAIN THE

LAW OF DEMAND

DEMAND IS THE

DESIRE FOR SOMETHING

AND THE ABILITY

TO PAY FOR IT

THE LAW OF DEMAND:

WHEN A GOOD`S PRICE IS LOWER, CONSUMERS WILL

BUY MORE

WHEN A GOOD`S PRICE IS HIGHER,

CONSUMERS WILL BUY LESS

THE PRICE OF GOODS STRONGLY

INFLUENCE US

TAKE PIZZA FOR EXAMPLE: WOULD YOU PAY $1

DOLLAR A SLICE?

WOULD YOU PAY $3 DOLLARS A SLICE?

WOULD YOU PAY $10 DOLLARS A SLICE?

THE HIGHER THE COST OF PIZZA,

THE LESS LIKELY YOU WILL BUY

THIS IS THE LAW OF DEMAND

OBJECTIVE 2UNDERSTAND HOW THE SUBSTITUTION EFFECT AND THE INCOME EFFECT

INFLUENCE DECISIONS

THE LAW OF DEMAND IS RESULT OF 2

PATTERNS OF BEHAVIOUR

1 - SUBSTITUTION EFFECT

WHEN COST OF PIZZA IS TOO HIGH…

PEOPLE LOOK TO CHEAPER ALTERNATIVES

2 - INCOME EFFECTRAISING PRICES MAKE US FEEL

POORER

CUT BACK ON PURCHASES,

CAN´T BUY AS MUCH AS USED TO

FEWER SLICES WITHOUT INCREASING

OTHER PURCHASES

SPENDING MORE,

BUT CONSUMPTION DOWN

OBJECTIVE 3CREATE A DEMAND SCHEDULE FOR AN INDIVIDUAL AND A

MARKET

A DEMAND SCHEDULE LISTS THE QUANTITY OF A

GOOD…

…THAT A PERSON WILL PURCHASE AT EACH PRICE IN

A MARKET

1 – INDIVIDUAL DEMAND SCHEDULE

EG. PIZZA $1 PER SLICE, ASHLEY BUYS 4 SLICES

PIZZA $2 PER SLICE, ASHLEY BUYS 2 SLICES

PIZZA $3 PER SLICE, ASHLEY BUYS 0 SLICES

2 – MARKET DEMAND SCHEDULE

EG. PIZZA $1 PER SLICE, PEOPLE BUY 250 SLICES

PIZZA $2 PER SLICE, PEOPLE BUY 150 SLICES

PIZZA $3 PER SLICE, PEOPLE BUY 50 SLICES

OBJECTIVE 4INTERPRET A DEMAND GRAPH USING DEMAND

SCHEDULES

DEMAND CURVE IS A GRAPHIC REPRESENTATION OF

DEMAND SCHEDULE

VERTICAL AXIS LOWEST PRICE AT BOTTOM

VERTICAL AXIS HIGHEST PRICE AT TOP

HORIZONTAL AXIS LOWEST DEMAND AT LEFT

HORIZONTAL AXIS HIGHEST DEMAND AT RIGHT

CAN BE USED TO PREDICT BUYING

HABITS

EG. A DEMAND CURVE