Economics Chapter 4: demand

The Law of Demand

-- The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. -- The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. -- As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more.

Law of Diminishing marginal utility

A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product. -- ** This is the premise on which buffet-style restaurants operate. They entice you with "all you can eat," all the while knowing each additional plate of food provides less utility than the one before. And despite their enticement, most people will eat only until the utility they derive from additional food is slightly lower than the original. **

Factors affecting Elasticity of demand

Availability of substitutes Luxury vs. necessity Can the purchase be delayed Portion of income needed to purchase

Two "provisos" (additions) to the law of demand

Ceteris Paribis- all things held constant or equal. "A Moment frozen in time." Willing and able. The customer must be both willing and able to purchase the item.

6 Factors affecting demand

Consumer income- a rise in income will result in a general increase in demand Demand curve will SHIFT outwards (to the right) A decrease in income will result in a general decrease in demand Demand curve will SHIFT to the left Consumer tastes- Trends, new products, seasonal trends, popularity Substitutes-a change in price of related products can cause a change in demand Butter and margarine Complements-the use of one increases the use of the other Computers and software A change in price will change demand for both in the same direction Change in expectations- expectations of a product in the future Iphone Car-buying time(about this time of year) Number of consumers- affects the market demand curve (the sum of all individual demand curves) The more consumers the greater demand (in general) The fewer consumers the less demanded (in general)

Factors affecting Quantity demanded

There are two factors that affect quantity demanded: (graphical representation) a movement ALONG the demand curve 1-The income effect- change in Qd because of a change in price that alters consumers' real income Buy 6 DVD's at $15 =$90; price drops to $10/DVD=$60 $30 "richer" 2-The substitution effect- change in Qd because of a change in the relative price of a product.

(Inverse / direct) relationship between price and quantity demanded

inverse

Elasticity of demand

measure of responsiveness that tells us how Qd responds to a change in price.

Demand

refers to how much (quantity) of a product or service is desired by buyers.

quantity demanded

the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.

Unit elastic

where a change in price causes a proportional change in Qd

Elastic-

where a change in price causes a relatively large change in Qd

Inelastic

where a change in price causes a very small if any change in Qd