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E. Napp
Understanding Demand
Students will be able to identify characteristics of the law of demand.
Students will be able to define and/ or identify the following terms:
Law of Demand
Substitution Effect
Income Effect
E. Napp
Look at this demand curve.What happens to quantity purchased
as prices rise?
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Why do we purchase more when a saleoccurs?
E. Napp
The Law of Demand
• The law of demand states that consumers buy more of a good when its price decreases.
• Conversely, consumers buy less of a good when its price increases.
• Consumers love low prices.
E. Napp
It’s obvious, isn’t it? Consumerslove low prices.
E. Napp
The Substitution Effect• One reason that the law of demand exists
is the substitution effect.
• The substitution effect occurs when a consumer reacts to an increase in a good’s price by buying less of that good and more of a similar yet cheaper good.
• When the price of orange juice rises, consumers substitute cheaper apple juice for orange juice.
E. NappIt really depends on the price, doesn’t it?
E. Napp
The Income Effect
• The income effect is the change in consumption resulting from a change in income.
• In other words, when prices rise, your money buys less.
• Higher prices reduce your purchasing power.
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Lower prices allow consumers toincrease demand.
Lower prices increase consumers’purchasing power.
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A demand schedule records the quantitydemanded at various prices.
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A demand schedule can easily be converted to a demand curve.
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Economists love graphs because graphsprovide easy understanding of economic
concepts.
E. Napp
If a picture is worth a thousand words,a graph is worth even more.
E. Napp
Questions for Reflection:
• State the law of demand.
• Provide an example of the substitution effect.
• How does the income effect lead to the law of demand?
• What is a demand schedule?
• What is a demand curve?
• Why do economists love graphs?