Chapter 4 Understanding Demand

Yoliann PonsPeriod.5

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A demand is something one desires, like a basic command.

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The Law Of Demand

-if the price goes down the quantity demanded goes up.-If the price goes up the quantity demanded goes down.

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Some Effects Through The Law Of Demand

In the law of demand it’s the want and the need of an item to be lower so it can be consumed.-it’s a demand of two patterns of behavior.

-Substitution effect -Income effect

Through the effects consumer can change and control their spending limits

Control Through the effects consumers can change and control their spending limits.

- Both effects give out reasons why price decreases the quantity purchased.

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Substitution Effect

The substitution effect also goes to dropping prices.

-If an item drops its price then that item becomes cheaper compared to others.http://www.designofsignage.com/application/symbol/hospital/image/600x600/arrow-up.jpg

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ExampleWhen a price of a regular item suppose shoes increase then ones budget cant buy as much as it use to. http://www.sanjoseca.gov/district10/images/budget.jpg

Consumption

Is always measured through the amount of a good that is purchased.

Chart Of Law Of Demand

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The Income Effect

The income effect makes all of us more poor, specially when everyday things start to increase such as movie tickets, fast food restaurants and gas prices. All the goods become unaffordable that its impossible to have a good amount of goods. http://weblogs.baltimoresun.com/news/technology/dollar-sign.jpg

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A Demand Schedule

A demand schedule is a table that makes it easier to list the quantity of a good a person will buy at each different price.

The law of demand explains how the price of any item affects the quantity demanded of that item

- If you are thinking to demand a for a good, you must be willing and be able to buy it at the specific price. (you want the good but you can most importantly AFFORD to buy it).

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The Demand Graph

- A demand curve is a graphic representation of a demand schedule.

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Limits Of A Demand Curve

The market demand curve can be used to predict how people will change their buying habits when the price of a good RISES OR FALLS.

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What Causes a Shift?

1. Income

2. Consumer Expectations

3. Population

4. Consumer Tastes and Advertising

A change in the price of a good does not cause the demand curve to shift

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Income

Most items we purchase are normal goods, goods that consumers demand more of when their income increases. A rise in income would cause the demand to shift to the right of the curve is called increase in demand. A fall in income would cause the demand curve to shift left, this is called decrease in demand. Inferior goods – an increase in income causes demand for these goods to fall.

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Demand Curve Shift

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Consumer Expectations

The expectation of a higher price in the future has caused your immediate demand to increase

If you expect the price to rise, your current demand will rise, which means you will buy the product sooner.

If you expect the price to drop, your current demand will fall and you will wait for the lower price.

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Population

Changes in the size of the population will affect the demand for most products.

Population trends can have a strong effect on certain goods.

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Consumer Tastes and Advertising

Advertising and publicity often play an important role in why some fads begin.

Changes in tastes and preferences cannot be explained by changes in income or population or worries about the future price increases.

Companies spend money on advertising because they hope that it will increase the demand for the goods they sell.

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Prices of related goods

The demand curve for one good can be affected in the demand for another good.There are 2 types of related goods

1. Complements – 2 goods that are bought and used together.

2. Substitutes – goods used in place of another

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Changes in demand

Cetris paribus- all other things held constant.

Economists use that term when referring to changes in price, and number of sales staying the same.

A demand curve is accurate only when the only change is price.

An increase in price and decrease in sales would lead to decrease in the quantity demand

A decrease in price and increase in sales would lead to an increase in demand.

A change In demand is shift of the entire curve.

Elasticity of Demand

Elasticity of demand basically means how much the buyer still wants or doesn’t want a good or service due to a price drop or raise.

Inelastic

Inelastic is that even if the price rises or drops on a specific good or service, the buyer’s want (demand) stays the same.

Elastic

Elastic basically means that if a price in a good or service changes by any slight amount , the buyer’s want (demand) will also change.

Calculating Elasticity

Formula = percentage change in the . demand of a good__________

percentage change in the price . of a good.The results are usually negative because an increase in the price of a good will always decrease the quantity of demand.

Values of Elasticity

Unitary elastic – is a demand in which its elasticity is equal to 1.

Factors Affecting Elasticity

There are some factors that can affect a persons elasticity of demand for a good or service.

Ex.: Some characteristics about different goods set them apart and make your demand for those goods less elastic.

Availability of Substitutes

If there are little substitutes for a good, then even if the price drops or rises, you would still buy it because the substitutes are not as good.

For example: If your favorite Broadway show is performing , and you want to go, there really no good substitute for a ticket. You can go see another show , but it wouldn’t be as good. So even if the price changes slightly, your demand stays inelastic. Meaning you would still buy the ticket .

Relative Importance

A second factor in choosing a good’s elasticity of demand is how much of your budget you spend on that specific good.

For example: If you already spent a big amount of your budget on a good, then a price increase might cause you to make some hard decisions. Making your demand elastic.

Necessities Versus Luxuries

The third factor in choosing a good’s elasticity depends on whether the person thinks the good is a necessity or a luxury.Ex: A necessity is a good that people need. Meaning they will always buy it even if the price changes. Making they’re decision inelastic. Ex: A luxury is a good that people want. Therefore, if the price increases, people might not buy that good because it is not needed. Making they’re decision elastic.

Change over time

When the price of a good changes, the customers need time to change their habits of shopping.

When the prices go up, the customers take time to find a substitute.

Elasticity and revenue

Elasticity helps us measure how costumers respond to price changes on different products.

The elasticity of demand determine how a change in prices will affect a firms total revenue or income.

Elasticity and revenue:computing a firm’s total revenue.

A total revenue is the amount of money a company receives by selling its products.

This is determined by the price and the quantity sold.

Elasticity and revenue:total revenue and elasticity demand

When a good has an elastic demand, raising the price of each unit sold by twenty percent will decrease the quantity sold by a larger percentage.The same process can be the opposite, if the firm were to lower the prices by certain percentage, the quantity demanded can raise by an even greater percentage.

Elasticity and revenue:total revenue and inelastic demand.

When a demand is inelastic, the consumers demand is not very responsive to the price changes.A decrease in price increases the quantity demanded if the demand is inelastic. However, demand doesn’t rise to much in percentage, as the price falls, the total revenue decreases.

Elasticity and revenue:elasticity and price policies.

Helps decide and recognize weather the demand for the product is elastic or inelastic.