Why is the Law of Demand True?

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Your favorite team is
in the Super Bowl:
1. How many tickets
are available?
2. How many people
want tickets?
3. What determines
the price of a ticket?


Demand: The desire to own something and
the ability to pay for it.
Law of Demand: As the price of a good
increases, quantity demanded decreases (and
vice versa)

In other words: when price goes up, we buy
less…when price goes down, we buy more

1. The Substitution Effect.
occurs when consumers react to an increase in a
good’s price by consuming less of that good…
and more of other goods that satisfy the same
basic need.
OR
2. The Income Effect:
The quantity of an item you consume
changes if its price changes but your
income does not.
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Demand Schedule: a table that lists the
quantity of a good that a person will purchase
at each price in the market.
Market Demand Schedule: a table that lists
the quantity of a good all consumers in a
market will buy at each different price.
Demand
Schedules
Individual
Demand
Schedule:
Price of Pizza
Quantiy
Slice
Demanded/day
$
0.50
5
$
1.00
4
$
1.50
3
$
2.00
2
$
2.50
1
$
3.00
0
Market Demand
Schedule:
Quantiy
Price of Pizza Slice Demanded/day
$
0.50
300
$
1.00
250
$
1.50
200
$
2.00
150
$
2.50
100
$
3.00
50
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Assuming I get my candy for free, if the
following market demand schedule is true,
how much should I charge for M&M’s? Why?
Market Demand Schedule for M&M's:
A.
B.
C.
D.
Price of M&M's
$2
$1
$0.50
$0.25
Quantity Demanded/Day
100
200
500
700
Market Demand Schedule for M&M's:
A.
B.
C.
D.
Price of M&M's
$2
$1
$0.50
$0.25
Quantity Demanded/Day
100
200
500
700
Profit
$200
$200
$250
$175
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
Demand Schedule: a table that lists the
quantity of a good that a person will purchase
at each price in the market.
Market Demand Schedule: a table that lists
the quantity of a good all consumers in a
market will buy at each different price.
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So what is a demand curve?
Very Simple, a demand curve is just a
graphical representation of a demand
schedule.
Market Demand
Schedule:
Price of Pizza Slice
$
0.50
$
1.00
$
1.50
$
2.00
$
2.50
$
3.00
Quantiy
Demanded/day
300
250
200
150
100
50
1. Complements: Products
that you would purchase
together. (Ex, Chips and
Salsa).
2. Substitutes: Products
that are similar. You
would buy the other if the
price of one got too high
(Ex: Coke and Pepsi).
3. Normal Good: A
product that you buy more
of as your income goes up.
(EX: Cars, clothes, Xbox
games, almost everything.
4. Inferior Good: A
product you buy less of as
income increases. (EX:
Ramen Noodles, Mac &
Cheese
Price per slice (in dollars)
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50
0
0
50
100
200
250
150
Slices of pizza per day
300
350
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Can only be used to predict how
people’s buying habits might change
when price and ONLY price changes
When price changes, it is called a
movement along the demand curve or a
change in quantity demanded (there’s
no way to simply remember this…you
must memorize! Sorry.)
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Horizontal axis shows quantity
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Vertical axis shows price
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Let’s talk about horizontal, vertical,
and quantity.
Remember this market
demand schedule for
pizza?
Market Demand
Schedule:
Price of Pizza Slice
$
0.50
$
1.00
$
1.50
$
2.00
$
2.50
$
3.00
Quantiy
Demanded/day
300
250
200
150
100
50
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IMPORTANT: That demand schedule shows
what happens to the quantity of pizza
demanded when price, and ONLY price
changes.
But there are other things that can cause the
ENTIRE demand curve to shift.
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Causes of a change in demand:
1. Income (if we make more $, we will
demand more of a good at any price. The
opposite is also true!).
2. Consumer expectations (If we expect prices
to rise in the future, we’ll be more likely to
spend more $ now. If we expect a sale, we
will be less likely to spend more now).
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3. Consumer tastes and advertising (Think
about it…why do companies use celebrities to
promote their products?).
4. Population (If population goes up…so
does demand. Think baby boomer gen.).
5. Prices of related goods (substitutes and
compliments). (If the price of tortilla chips
increases, what will happen to the demand
for salsa?).
Price per slice (in dollars)
Market Demand Curve
3.00
2.50
2.00
1.50
1.00
.50
0
0
50
100
200
250
150
Slices of pizza per day
300
350
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What is the difference between a
“change in quantity demanded” and a
“change in demand” ?
Change in Quantity Demanded: a
movement along the demand curve
caused by a change in price
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Change in Demand: A shift in the demand
curve due to factors other than price.
Basically it shows that demand has changed
at all different price levels.
Put a star next to this point in your notes.
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