Demand The Market System • In the U.S. most goods are allocated through a market system. • The interaction between buyers and sellers determines the prices of most goods and the quantity produced. Think of a product you buy when the price goes down. The Law of Demand Price Demand As price goes down… Quantity demanded goes up Price As price goes up… Demand Quantity demanded goes down The law of demand is the result of two behavior patterns. They explain why consumers change their spending patterns. The law of demand is the result of two behavior patterns. They explain why consumers change their spending patterns. The Substitution Effect The Income Effect The law of demand is the result of two behavior patterns. They explain why consumers change their spending patterns. The Substitution Effect When consumers react to an increase in price by consuming less of that good and more of another good. The Income Effect The law of demand is the result of two behavior patterns. They explain why consumers change their spending patterns. The Substitution Effect When consumers react to an increase in price by consuming less of that good and more of another good. The Income Effect When rising prices makes you feel poorer. When you can no longer afford to buy the same combination of goods, and you must cut back your purchases of other goods. Brainstorm Turn to someone sitting next to you and brainstorm a scenario that illustrates the role of the substitution effect and the income effect on demand. Each of you must write it in your notes. Economic Terms Schedule = A table of Information Curve = a graphic representation of the information from the table. Using the following data make a market demand schedule and then graph the demand curve. • At a price of 80 cents per pound, the demand for apples was 14,000 pounds. • At 60 cents per pound, the demand is 20,000 pounds. • At 40 cents per pound, the demand is 26,000 pounds. • At 20 cents per pound, the demand is 32,000 pounds. Changes in Demand • When other factors besides price change demand it shifts the entire curve to the left or the right. What causes the shift in demand? • Income • Consumer Expectations • Population • Consumer Tastes and Advertising Shifts in Demand IncomeA consumers income affects his or her demand for most normal goods. We demand more of these when our income increases. The demand for inferior goods, (something you buy in smaller quantities) will not change due to a rise in income. Shifts in Demand Consumer Expectations – If you expect prices to go up in the near future then you are more likely to buy the item today. If you expect the price to be less in one week then you will probably wait. Future expectations have caused your immediate demand to increase or decrease. Shifts in Demand Population – Changes in population will affect the demand for most products. Example: If the population increases there will be a demand for more housing. Shifts in Demand Consumer Tastes and Advertising– Clever advertising campaigns, social trends, the influence of TV., the internet, music or some combination of these factors explain why demand for a product can be hot one minute and cold the next. Prices of Related Goods • The demand curve for one good can be affected by a change in the demand for a another good. Complements - are two goods that are bought and used together. (I pod and headphones, car and tires) Substitutes – are goods used in place of one another. (If the price of snowboards went up drastically consumers could substitute with skis) Your Turn • Think of a single product and speculate on how demand for that product might change due to income fluctuations, population trends, consumer expectations and tastes, and advertising. • Draw a product and then using a concept web explain the affects of the above on demand.