Demand

How the consumer influences

how I make money
 Law of Demand
Part 1. As PRICE increases, DEMAND decreases

Demand goes down

Price goes up
THEN

Part 2. As PRICE decreases, DEMAND increases

Price goes down

Demand goes up
THEN
 Demand Curve

• A graph that illustrates the demand for

a product

• It shows how much consumer desire

for a product changes as the price
changes
 Market Demand Curve: This curve illustrates
the quantities of apple juice demanded at each
price of all consumers in the market.
Price of a Quantity
$3
bottle of demanded per
Apple Juice week
Price per bottle (in dollars)

$2

$2
Demand $0.75 800
Curve
$1

$1
$1.00 650
$0 $1.25 500
50 200 350 500 650 800
Bottles of Apple Juice per
week
$1.50 350
$1.75 200
$2.00 50
 Elasticity of Demand

• The degree to which changes in price

cause changes in demand
or
• If we change the price, will demand
change a lot or a little?
 Elastic Demand

• If Demand for a good is very sensitive to

changes in price, the demand is ELASTIC
Or
• If prices changes a little bit, demand will
change a lot!
 Example of Elastic Demand

• Price of pizza goes up even a little bit,

demand goes down a lot.
 Elastic Demand for Pizza
Curve is FLAT
$16
$15
Price per Pizza

$14
$13 Demand for Pizza
$12
$11
$10

Number Purchased per Week

 Inelastic Demand

• Demand for a good that consumers

will continue to buy despite a price
increase is INELASTIC
OR
• Even if price changes a lot, demand
changes very little
Example of Inelastic Demand

• The price of soap goes up a lot, the

demand stays almost the same.
 Inelastic Demand for Soap
Curve is STEEP
$3.50
Price per Bar of Soap

$3.00
$2.50
$2.00
Soap
$1.50
$1.00
$0.50
$0.00
0 10 20 30 40 50
Quantity Demanded (In
Thousands)
 Factors Affecting Elasticity
• Several different factors can affect the
elasticity of demand for a certain good.
1. Availability of Substitutes
If there are few substitutes for a good, the
demand will not likely decrease as price
increases (inelastic), the opposite (lots of
substitutes) is also usually true (elastic)
Ex. Gasoline has no substitutes- inelastic
McDonalds has many (Burger King, etc)-
elastic
 Factors Affecting Elasticity
(Cont.)
2. Relative Importance
Another factor determining elasticity of
demand is how much of your budget you
spend on the good.
Ex. Mortgage payment must be paid (inelastic)
Entertainment (movies, etc.) are elastic
 Factors Affecting Elasticity (Cont.)
3. Necessities vs. Luxuries
Whether a person considers a good to be a
necessity or luxury has a great impact on the
good’s elasticity of demand for that person.
Ex. Food (inelastic)
Jewelry (elastic)
Factors Affecting Elasticity (Cont.)
4. Change over Time
Demand sometimes becomes more elastic over
time because people can eventually find
substitutes.
Ex. Blockbuster used to be the only place to
rent videos (inelastic)
Netflix, Video on Demand, Pay Per View, are
substitutes for Blockbuster (elastic)
 Change in Demand

• A demand curve is only accurate as long as

there are no changes other than price that
could affect a consumer’s decision
• When factors other than price (non-price
factors) affect the demand curve, the entire
curve shifts to the left or to the right
 Non-Price Factors that effect
Demand

• These factors will cause the demand

curve to shift to the left (less quantity
demanded) or to the right (more
quantity demanded)
 Change in Demand: Recently, Farley High School
changed boys hockey from a varsity sport to an
intramural sport. As a result, they needed to buy fewer
hockey pucks. The decrease in demand is shown by a
shifting demand curve.
$1.75
$1.50
$1.25
Original
$1.00 Demand
$0.75 New Demand
$0.50
$0.25
$0.00
10 20 30 40 50 60 70
 1. Change in Income
• As people earn more money, the demand for
luxury goods will increase
• As people earn less money, the demand for luxury
goods will decrease

• Ex. If I win the lottery, I’ll buy a Jaguar

If I get laid off, I’ll take the bus
 2. Substitution Effect

• If there is a substitute product,

demand for an item may be influenced
by the price of the substitute

• Ex. If the price of butter goes up,

people will substitute margarine.
 3. Complimentary Products

• The demand for an item will increase or

decrease if the price of a complimentary
product (something that goes with it) increases
or decreases
• Ex. If the price of hot dogs goes up, the
demand for hot dogs goes down, thereby
decreasing the demand for hot dog buns
 4. Change in Attitudes

• As people’s attitudes about products

change, so does the demand

• Ex. Fashion, music, food

 How does Scarcity affect
Demand?

• If there is a scarcity of an item, the

demand goes up.

• Ex. Gasoline
How does a boycott affect demand?

• If an item is being boycotted, there is

little to no demand for the item.

• Ex. During the Montgomery bus

boycott, there was little or no demand
for the Montgomery bus system.
 How did the War in Afghanistan
affect demand?

• Increased demand for war-related resources

• Ex. Metal (bullets, vehicles), cloth
(uniforms), gas masks
• Increased demand for news
• Ex. News interruptions during television
shows, new news stations, internet sites.