Chapter 4:1 Understanding Demand · 2019-10-09 · The Substitution Effect: •Takes place when a consumer reacts to a rise in the price of one good, by consuming less of that good
Post on 16-Mar-2020
1 Views
Preview:
Transcript
Chapter 4:1 Understanding Demand
Objectives o We will explain the law of
demand.
o We will examine how the
substitution effect and the
income effect influence
decisions.
Pro_12:12 The wicked desireth the
net of evil men: but the root of the
righteous yieldeth fruit.
What is demand?
• Demand is the desire
to own something and
the ability to pay for it.
• To have demand for a
good or service, both
of these conditions
must be present.
The Law of Demand: • That when a goods price is
lower, consumers will buy more of it.
• When the price is higher, consumers will buy less of it.
• All of us act out this law of demand in our everyday purchasing decisions.
The Law of Demand: • The law of demand is the
result of not one pattern of behavior but two separate patterns that overlap.
• These two behavior patterns are the substitution effect and the income effect describe two different ways what a consumers can change his or her spending patterns.
The Substitution Effect: • Takes place when a consumer
reacts to a rise in the price of one good, by consuming less of that good and more of a substitute good.
• The Substitution effect can also apply to a drop of prices.
• An example is someone loves pizza but the price increases, so that person instead buys a cheaper alternative such as tacos.
Discussion Question
• What are some items that you are willing to
substitute should the price goes up? List
five and explain why.
o Jer_17:9 The heart is deceitful above all things, and desperately wicked: who can know it?
o Pro_23:26 My son, give me thine heart, and let thine eyes observe my ways.
o Eze_36:26 A new heart also will I give you, and a new spirit will I put within you: and I will take away the stony heart out of your flesh, and I will give you an heart of flesh.
The income effect:
• Rising prices have another effect
that we have all felt.
• If you buy few slices of pizza
without increasing your purchases
of other foods, that is the income
effect.
Income Effect • One important fact to remember is
that economists measure consumption in the amount (quantity) of a good that is bought, not the amount of money spent to buy it.
• When the price goes up, consumers spend more of their money on a good but they may demand less of it.
• Thus, the income effect has led to a decrease in the quantity demanded.
A DEMAND SCHEDULE
• If you owned a store knowing the
demand schedule of one customer
might not be as helpful as knowing
how all of your customers would
react to price changes.
A DEMAND SCHEDULE
• When you add up the demand
schedules of every buyer in the
market, you can create a market
demand schedule.
• A market demand schedule
shows the quantities demanded
at various prices by all
consumers in the market.
A DEMAND SCHEDULE
• For example, a market demand
schedule for pizza would allow a
restaurant owner to predict the
total sales of pizza at several
different places.
A DEMAND SCHEDULE
• The owner of pizzeria could create a market demand schedule for pizza slices by surveying his or her customers and then adding up the quantities demanded by all individual consumers to each price.
• At higher prices the quantity demanded is lower.
top related