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.