Economics Unit 4 Lesson 1 What is Demand

Economics Unit 4, Lesson 1 What is Demand? © 2012, TESCCC

Objectives 1. 2. 3. 4. 5. 6. Know the definition of demand. Explain the three conditions for demand. Describe and construct a demand schedule. Construct a demand curve. Explain the law of demand. List and explain the three concepts that explain the law of demand. © 2012, TESCCC

DEMAND – Definition Amount of goods and services a consumer is willing and able to buy at various prices in a given time period © 2012, TESCCC

Conditions for Demand In this definition, we see there are three conditions for demand. 1. Willingness or desire 2. Ability – Financial means 3. Given time period © 2012, TESCCC

Are you willing to buy a Maserati? Do you want one? © 2012, TESCCC

Are you able to buy a Maserati? We mean financial ability. © 2012, TESCCC

Specific Time Period • Will you buy a Maserati this year? © 2012, TESCCC

All buyers generally behave the same way, so we can make some generalities. © 2012, TESCCC

When price increases. . . quantity demanded decreases. OR When price decreases. . . quantity demanded increases. © 2012, TESCCC

This is called the law of demand!!! It shows the inverse relationship between price & quantity demanded. P↑ QD↓ P↓ QD↑ © 2012, TESCCC

Demand Schedule • Demand schedule – shows quantity demanded at various prices for one consumer • Market Demand schedule – shows quantity demanded by all consumers in the market © 2012, TESCCC

Demand Schedule Price 0. 50 1. 00 1. 50 2. 00 2. 50 © 2012, TESCCC Quantity 300 250 200 150 100

Demand Curve • You see a demand curve slopes downward, from left to right, showing the inverse relationship between price and quantity demanded. © 2012, TESCCC

P . 50 300 © 2012, TESCCC Q

P 2. 50 2. 00 1. 50 1. 00 D . 50 0 © 2012, TESCCC 100 150 200 250 300 Q

Limitations of Demand Curve • The demand curve is only accurate for one set of conditions. It only shows changes in price. If anything other than price changes then the demand curve will no longer be valid. © 2012, TESCCC

Concepts That Explain the Law of Demand (why the demand curve slopes downward) © 2012, TESCCC

1. The Income Effect When the price of an item goes up or down, it is as if your income has changed; causing the quantity demanded to change. © 2012, TESCCC

In Other Words… If it costs buy © 2012, TESCCC more, you will less.

2. Substitution Effect If the price of an item changes, especially if it goes up, a consumer will substitute another item that is cheaper. This causes the quantity demanded to change. © 2012, TESCCC

3. Diminishing Marginal Utility As each additional unit of a good or service is consumed, the satisfaction received from consuming that good decreases. For example, the first hamburger you eat is great but the second is not as satisfying, so you would not be willing to pay as much for it. The third brings even less satisfaction. © 2012, TESCCC