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Demand

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by

Jason Eisele

on 6 September 2016

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Transcript of Demand

Demand
the quantities of a good or service that buyers are willing and able to buy at all possible prices during a certain time period.
Understanding demand provides insight into the behavior of buyers.
The Law of Demand shows how quantity demanded changes with price. For Example:
If Milky Ways cost
$1
each, I might buy
2
bars a week.
If Milky Ways cost
$.50
each, I might buy
3
bars a week.
If Milky Ways cost
$1.50
each, I might buy
1
bar a week.
Quantity (Q)
Price (P)
$.50
$.75
$1.00
$1.25
$1.50
$1.75
10
20
30
40
50
60
70
80
90
$2.00
P
Q
$.50
$1.00
$1.75
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Krispy Kreme Doughnuts
Demand Schedule
100
110
120
130
140
The demand curve is not static ...
... It shifts back and forth as conditions in the market change.
P
Q
D
P1
P2
Q1
Q2
Quantity Demanded
Only in response to a price change of the good/service
When the entire demand curve shifts, it is in response to a change in the market other than a change in the price of the product/service (NONPRICE FACTORS).
Non-Price Factors for Demand:
1. A change in consumers' price expectations
2. A change in consumer tastes or preferences
3. A change in the number of consumers in the market
4. A change in consumer income
5. A change in the price of a substitute good
6. A change in the price of a complementary good
P
Q
Do
D1
D2
INCREASE
DECREASE
Demand
An easy way to remember which way the demand curve shifts is this:
When demand is
LESS
, the demand curve shifts to the
LEFT
-- both start with L and have 4 letters.

P
P
P
P
P
P
P
P
Q
Q
Q
Q
Q
Q
Q
Q
Ammunition
Tablets
Gasoline
Normal Good
Inferior Good
Butter
Margarine
Peanut Butter
Jelly
Q
D1
D1
D1
D1
D1
D1
D1
D1
D1
The law of demand tells us HOW consumers respond to price changes, but it doesn't tell us HOW MUCH. That is where
demand elasticity
comes in ...

Definition:
demand elasticity is the measure of how much quantity demanded changes when there is a price change

Elastic Demand
Inelastic Demand
There are basically 3 ways to determine demand elasticity:
1. Look at the slope of the demand curve.
A demand curve with a gentle slope tends to be more
elastic
... meaning that consumers are very responsive to price changes.
A demand curve with a steep slope tends to be more
inelastic
... meaning that consumers are not very responsive to price changes.
2. Ask 3 basic questions.
Are there adequate substitutes available?
Can the purchase be delayed?
Does the purchase use a large portion of income?
3. Perform the Total Receipts Test.
Equation for total receipts
(or total revenue):

TR=Price * Quantity
When the price of a good rises, there are three possible outcomes for TR:
P
P
P
Q
Q
Q
D
D
D
TR could decrease
$3
$3
$3
4
4
4
$4
$4
$4
3
2
3.5
TR1=
TR2=
TR1=
TR2=
TR1=
TR2=
TR could increase
TR could stay the same
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If you answer
NO
to 2 or more
questions ==>
INELASTIC
If you answer
YES
to 2 or more
questions ==>
ELASTIC
Video Tutorials
Intro to Demand
Change in Quantity Demanded
vs. Change in Demand
Demand Elasticity
Law of Demand
Change in Price of
Related Goods
Other NonPrice Factors
Normal and Inferior Goods
More on Elasticity
Full transcript