Transcript Demand PPT 1

•Change
in Quantity Demanded
•Income Effect
•Substitution Effect
•Change
in Demand
(Demand Determinants)
Income
Consumer Expectations
Population
Consumer Tastes and Advertising
Complements and Substitutes

Change in quantity demanded
◦ A movement along the demand curve that shows a
change in the quantity of the product purchased in
response to a change in price

The Income Effect
◦ The change in quantity demanded because of a
change in price that alters consumers’ real income

The Substitution Effect
◦ The change in quantity demanded because of the
change in the relative price of the product.

When something happens that causes the
Demand Curve to shift.
◦ People are willing to buy different amounts of the
product at the same prices
◦ Shift to the right – shows an increase in demand
◦ Shift to the left – shows a decrease in demand

Change in demand results in entirely new
curve

When a Change in Demand occurs, a new
schedule and curve must be constructed to
reflect the new demand at all possible prices

Things that cause a new curve (shift to right
or left)
◦
◦
◦
◦
◦
Income
Tastes
The price of related goods
Expectations
Number of consumers

Consumer Income
◦ When your income goes up, you can afford to buy
more goods and services
◦ As incomes rise, consumers are able to buy more
products at each and every price
 Result: Shift to the right
◦ Decrease in income - Loss of income would cause
people to buy less of a good at each and every price
 Demand curve then shifts to the left, showing decrease
in demand.

Consumer Tastes
◦ Consumers don’t always want the same things
 Advertising, news reports, fashion trends, introduction
of new products
 Advertising helps promote products – When popularity
of products increases, people buy more of it
 When consumers want more of an item, they tend to
buy more of it at each and every price.
 Result: The demand curve shifts to the right
◦ If people get tired of a product, they buy less at
each and every price – causing shift to the left


Consumer Tastes (cont.)
Development of new products can have an
effect on consumer tastes
◦ Advances in technology
◦ Sometimes tastes and preferences change by
themselves
 Concerns about health greatly increases demand for
healthier, less-fattening foods
 Demand for smaller, more fuel-efficient cars ahs grown
◦ Causing a change in consumer tastes

Substitutes
◦ A change in the price of related products can cause
a change in demand
 Some products are known as substitutes because they
can be used in place of other products
 The demand for a product tends to decrease if the
price of its substitute goes down.
 The demand for a product tends to increase if the
price of its substitute goes up.

Compliments
◦ Other related goods are known as complements
 The use of one increases the use of the other
◦ Computers and Software
◦ Gillette corporation makes razor handles and razor
blades
 To generate a high demand for their products, the price
of the razor handles is kept low
 The razor blades are sold at very profitable prices
 Result, the company is able to use the profits on the
blades to offset the losses on the handles
 It is unlikely demand for Gillette blades would have
been as high if the handles had been more expensive.

Number of Consumers
◦ An increase in the number of consumers can cause
the market demand curve to shift
 When a large number of people leave the market for
good, the result is a decline in market demand

Normal good – A good is normal if it’s
consumption increases when the income
increases.
◦ Example: When your income increases, you buy
more clothes.

Inferior good – Consumption decreases when
the available income increases.
◦ Example: Used books and noodles – the more
income you have the less used books and noodles
you buy.

Unit Elastic – A given change in price causes a
proportional change in quantity demanded
◦ The percent change in quantity roughly equals the
percent change in price (5% drop in price causes a
5% increase in quantity demanded).


Elastic Demand – When a given change in
price causes a relatively larger change in
quantity demanded
Inelastic Demand – A given change in price
causes a relatively smaller change in the
quantity demanded.

Can the purchase be delayed?
◦ A consumer’s need for a product is sometimes
urgent and cannot be put off
◦ When this happens, demand tends to be inelastic –
product demanded is not especially sensitive to
changes in price
◦ Example: Diabetic needing insulin

If purchase of product is not necessary,
purchase can be delayed and is then
considered to be elastic

Are adequate Substitutes Available?
◦ If adequate substitutes are available, consumers
can switch back and forth between a produce and
its substitute to take advantage of the best price.
◦ If price of beef & butter go up, buyers can switch to
chicken and margarine
◦ With enough substitutes available, the more
inelastic the demand.