Demand
How the consumer influences how
I make money
Law of Demand
Part 1. As PRICE increases, DEMAND decreases
Demand goes down
Price goes up
THEN
Part 2. As PRICE decreases, DEMAND increases
Demand goes up
Price goes down
THEN
Demand Curve
• A graph that illustrates the demand for a
product
• It shows how much consumer desire for a
product changes as the price changes
Price per bottle (in dollars)
Market Demand Curve: This curve illustrates the
quantities of apple juice demanded at each price
ay all consumers in the market.
Price of a
bottle of
Apple Juice
$3
$2
$2
Demand
Curve
$1
$1
$0
50
200 350 500 650 800
Bottles of Apple Juice per
week
Quantity
demanded per
week
$0.75
800
$1.00
650
$1.25
500
$1.50
350
$1.75
200
$2.00
50
Elasticity of Demand
• The degree to which changes in price
cause changes in demand
or
• If we change the price, will demand
change a lot or a little?
Elastic Demand
• If Demand for a good is very sensitive to
changes in price, the demand is ELASTIC
Or
• If prices changes a little bit, demand will
change a lot!
Example of Elastic Demand
• Price of pizza goes up even a little bit,
demand goes down a lot.
Elastic Demand for Pizza
Curve is FLAT
Price per Pizza
$16
$15
$14
$13
Demand for Pizza
$12
$11
$10
0
10
0
20
0
30
0
40
0
50
Number Purchased per Week
0
60
Inelastic Demand
• Demand for a good that consumers will
continue to buy despite a price increase is
INELASTIC
OR
• Even if price changes a lot, demand
changes very little
Example of Inelastic Demand
• The price of soap goes up a lot, the
demand stays almost the same.
Inelastic Demand for Soap
Price per Bar of Soap
Curve is STEEP
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Soap
0
10
20
30
40
Quantity Demanded (In
Thousands)
50
Factors Affecting Elasticity
•
Several different factors can affect the
elasticity of demand for a certain good.
1. Availability of Substitutes
If there are few substitutes for a good, the
demand will not likely decrease as price
increases (inelastic), the opposite (lots of
substitutes) is also usually true (elastic)
Ex. Gasoline has no substitutes- inelastic
McDonalds has many (Burger King, etc)elastic
Factors Affecting Elasticity (Cont.)
2. Relative Importance
Another factor determining elasticity of demand
is how much of your budget you spend on the
good.
Ex. Mortgage payment must be paid (inelastic)
Entertainment (movies, etc.) are elastic
Factors Affecting Elasticity (Cont.)
3. Necessities vs. Luxuries
Whether a person considers a good to be a
necessity or luxury has a great impact on the
good’s elasticity of demand for that person.
Ex. Food (inelastic)
Jewelry (elastic)
Factors Affecting Elasticity (Cont.)
4. Change over Time
Demand sometimes becomes more elastic over
time because people can eventually find
substitutes.
Ex. Blockbuster used to be the only place to rent
videos (inelastic)
Netflix, Video on Demand, Pay Per View, are
substitutes for Blockbuster (elastic)
Change in Demand
• A demand curve is only accurate as long
as there are no changes other than price
that could affect a consumer’s decision
• When factors other than price (non-price
factors) affect the demand curve, the
entire curve shifts to the left or to the right
Non-Price Factors that effect
Demand
• These factors will cause the demand curve
to shift to the left (less quantity demanded)
or to the right (more quantity demanded)
Change in Demand: Recently, Farley High School changed
boys hockey from a varsity sport to an intramural sport. As
a result, they needed to buy fewer hockey pucks. The
decrease in demand is shown by a shifting demand curve.
$1.75
$1.50
$1.25
Original
Demand
New Demand
$1.00
$0.75
$0.50
$0.25
$0.00
10 20 30 40 50 60 70
1. Change in Income
• As people earn more money, the demand
for luxury goods will increase
• As people earn less money, the demand
for luxury goods will decrease
• Ex. If I win the lottery, I’ll buy a Jaguar
If I get laid off, I’ll take the bus
2. Substitution Effect
• If there is a substitute product, demand for
an item may be influenced by the price of
the substitute
• Ex. If the price of butter goes up, people
will substitute margarine.
3. Complimentary Products
• The demand for an item will increase or
decrease if the price of a complimentary
product (something that goes with it)
increases or decreases
• Ex. If the price of hot dogs goes up, the
demand for hot dogs goes down, thereby
decreasing the demand for hot dog buns
4. Change in Attitudes
• As people’s attitudes about products
change, so does the demand
• Ex. Fashion, music, food
How does Scarcity affect Demand?
• If there is a scarcity of an item, the
demand goes up.
• Ex. Gasoline
How does a boycott affect
demand?
• If an item is being boycotted, there is little
to no demand for the item.
• Ex. During the Montgomery bus boycott,
there was little or no demand for the
Montgomery bus system.
How does the War in Afghanistan
affect demand?
• Increased demand for war-related
resources
• Ex. Metal (bullets, vehicles), cloth
(uniforms), gas masks
• Increased demand for news
• Ex. News interruptions during television
shows, new news stations, internet sites.