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1.4 Demand
1.4 Demand
Essential Question:
Essential Question:
What effect does the price of a good or service have on consumer demand?
What effect does the price of a good or service have on consumer demand?
Learning Objectives
MKT-2.A:Learning Objectives
- A. Define (using graphs as appropriate) the law of demand
- B. Explain (using graphs as appropriate) the relationship between the price of a good or service and the quantity demanded
- Explain (using graphs as appropriate) the determinants of demand
Essential Knowledge
Essential Knowledge
- MKT-2.A.1
- The law of demand states there is an inverse relationship between price and quantity demanded, leading to a downward-sloping demand curve.
- MKT-2.B.1
- Factors that influence consumer demand, such as changes in consumer income, cause the market demand curve to shift
The price people pay for goods and services plays a crucial role in the choices they make as consumers, and hence in the economic system. If the price is too low, sellers will not sell. If it is too high, buyers will not buy. In general, buyers will purchase more of an item at a lower price and less at a higher price. But price is only one of several factors that affect demand and, therefore, the prices consumers pay. To understand how a nationa's economy functions, it is necessary to have some understanding of that nation's price system. And to understand the price system, it is necessary to understand the law of demand.
The Law of Demand
The Law of Demand
In economics, demand refers to the consumers' desire and ability to purchase goods and services. The law of demand describes the relationship between the quantity of goods and services that are demanded and the price. When all else is equal, there is an inverse relationship between the price and quantity demanded.
So as price increases, the quantity demanded decreases, and as prices decrease, the quantity demanded increases.
Determinants of Demand
Determinants of Demand
Determinants of demand are factors influence the total demand for a good or service, leading to a shift in the demand curve. There are five that are particularly important:
Change in Disposable Income
Change in Availability of Related Goods or Services
Change in Tastes or Preferences
Changes in Expectations about the Future
Change in the Number of Buyers in the Market
Graphing Demand
Graphing Demand
The demand for a good or service can be shown in a chart of data or a line graph. Either provides a simple way to analyze how much people want to purchase at various prices.
A demand schedule is a table showing the relationship between the price of a good or service and the quantity demanded when all other determinants are equal.
A graph of the deamnd table can be created by plotting the price on the vertical axis (y-axis) and the quantity demanded at that price on the horizontal axis (x-axis). By connecting the points, we have a downward-sloping line that relates the price and quantity demanded. This is called the demand curve.
Any change in determinants of demand can shift the demand curve to the right or left. When a change increases the quantity demanded at every price, the curve will shift to the right- an increase of demand.
If there is a reducation of demand at every price, the demand curve shifts to the left and is called a decrease in demand.
Topic Vocabulary
Topic Vocabulary
Summary of the Topic
Summary of the Topic
The price of a good or service has a significant effect on consumer demand in a competitive market, and this relationship is described by the Law of Demand. According to the Law of Demand:
As the price of a good or service increases, the quantity demanded by consumers decreases, ceteris paribus (all other factors remaining constant).
As the price of a good or service decreases, the quantity demanded increases, ceteris paribus.
This inverse relationship between price and demand can be explained by two main effects:
1. Substitution Effect:
When the price of a good rises, consumers may look for cheaper alternatives or substitutes. For example, if the price of beef increases, consumers might buy more chicken instead, leading to a decrease in the demand for beef.
Conversely, if the price of a good falls, it may become more attractive relative to substitutes, increasing its demand.
2. Income Effect:
When the price of a good decreases, consumers' real income (or purchasing power) effectively increases. This makes consumers feel wealthier, allowing them to purchase more of the good. For example, if the price of gasoline falls, consumers may have more money left over to spend on other goods, which can increase the demand for gasoline.
If the price of a good increases, consumers' real income decreases, and they may reduce their consumption of the good.
Demand Curve:
The Law of Demand typically results in a downward-sloping demand curve on a graph, where the price is on the vertical axis and the quantity demanded is on the horizontal axis. As the price decreases, the quantity demanded increases, and vice versa, illustrating the inverse relationship.
In general, though, for most goods and services, the price has an inverse effect on the quantity demanded, with lower prices leading to higher demand and higher prices leading to lower demand.
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