MASON EDUCATION
 Bell J
 Vocab
 Ch. Breakdown
 Lecture notes
 Surveying Demand handout
List two items that are in high demand
List two items that are not in demand
Objectives
 Explain the law of demand
 Understand how the substitution effect and the
income effect influence decisions
 Create a demand schedule for an individual and a
market
 Interpret a demand graph using demand schedules
 Buyers demand goods, sellers supply those
goods, and the interactions between the two
groups lead to an agreement on the price and
the quantity traded.
 Demand is the desire to own something and the
ability to pay for it.
 The law of demand says that
when a good’s price is lower,
consumers will buy more of it.
When the price is higher,
consumers will buy less of it.
 The price of a good will strongly
influence your decision to buy
 The law of demand is the result of two separate patterns of
behaviors that can overlap
 Substitution effect
 Income effect
 Both describe two ways a consumer can change their
spending patterns
The Substitution effect
 When the price of a good rises the demand for that good goes down
 The incentive for consumers to buy a substitute good at a lower price goes
up
The Income effect
 Rising prices make you feel poorer, rising prices don’t allow you to buy as
much as normal
 Cutbacks in purchases due to a increase in price without purchasing
substitutes
 Economist measure consumption in the amount of good that was bought not
the amount of money spent to buy it.
 Even though people spend more money when prices rise the quantity
demanded goes down. This is the law of demand.
 How does the substitution & income effect influence decisions when prices
go down?
 When prices fall you substitute your chosen good for
alternatives because of the drop in price
 When prices fall you feel wealthier and chose to buy more
of a chosen good than normal due to the drop in price.
 A demand schedule is a table that lists the quantity of a good that a
person will purchase at each price in a market. (Smaller #’s)
 A market demand schedule shows the quantities demanded at each
price by all consumers in the market. (Larger #’s)
 A market demand schedule helps predict the total sales at several
different prices
 Law of demand exhibited
 Plotting figures from a demand schedule onto a graph would create a
demand curve
 A demand curve is a graphic representation of a demand schedule
 Vertical Axis: Price
 Bottom to top/ lowest-highest
 Horizontal Axis: Quantity
 Left to right/ lowest-highest
 The demand graph only shows relationship between price and quantity of
purchased goods
 All of factors are assumed constant
 ex: income, substitutes price, quality
 Demand schedules and curves reflect law of demand
 A market demand curve can predict peoples buying habits based on $
increase or decrease
 Market demand curves are very accurate for specific market conditions
 Complete the Analyzing Tables questions
 Pg. 84
 1-3
 Section Assessment
 Don’t write questions (1-6)
 Objectives:
 Understand the difference between a change in quantity demanded and a shift in
the demand curve
 Identify the determinants that create changes in demand and that can cause a shift
in the demand curve
 Explain how the change in the price of one good can affect demand for a related
good.
 A demand curve is accurate only as long as there are no changes other than price
 Ceteris paribus- “all other things held constant.”
 When price change moves along the curve to a new the quantity demanded
 Increase in $=Decrease in the quantity demanded
 Decrease in $=Increase in the quantity demand
 When we drop the ceteris paribus rule and allow other factors (not $) to change we no
longer move along the demand curve
 The entire demand curve shifts
(demand at every $ shifts)
 Change in demand
 Right shift -Increase in Demand
 Left shift-Decrease in Demand
 Several other factors can cause demand for a good to change
 These change can create a change in demand not just a change in quantity
demanded
 Income
 Consumer Expectation
 Population
 Consumer taste and Advertising
 Income
 A consumers income effects his/her demand
 Normal goods-demand rises when income increases
 Inferior goods-demand rises when income decreases
 Consumer Expectation
 Our expectation about the future can affect our demand for certain goods today.
 Expected price rise-demand rises
 Expected price drop-demand drops
 Population
 Changes in the size of the population will also affect the demand for most
products
 Population trends can have a strong effect on certain goods
 Ex: Homes, apartments, trailers (hurricane Katrina)
 Consumer taste and Advertising
 Economist cannot always isolate the reasons why fads begin advertising
and publicity often play an important role
Population
Consumer taste and
Advertising
 The demand curve for one good can be affected by change in the demand for
another good.
 Two types of related goods
 Complements-are two goods that are bought and used together.
 Skis & Ski boots
 Substitutes-goods used in place of another
 Skis & Snowboards
 Economist describe the way that consumers respond to price changes as
elasticity of demand.
 Your demand for a good that you will keep buying despite a price increase is
inelastic
 If you buy much less of a good when the price increases your demand is elastic
 Highly elastic demand for a good is very responsive