The Law of Demand says that a decrease in a good’s own price will result in an increase in the amount demanded, holding constant all the other determinants of demand. The Law of Demand says that demand curves are negatively sloped.

P P1 A B P P2 D1 Q1 Q2 D2 Q CHANGE IN PRICE= change in quantity demanded Q CHANGE IN OTHER= change in demand .

. holding constant all other determinants of demand. › The INDEPENDENT variable is the good’s own price. The demand curve for any good shows the quantity demanded at each price. › The DEPENDENT variable is the quantity demanded.

be negatively sloped.e.. demand quantity demanded Market for tacos . i. own pric e A demand curve must look like this.

including the good’s own price. own price \$1/can How does this affect the demand curve? demand @ I = \$1000 Market for beer quantity of beer Go to hidden slide . holding constant all other factors affecting demand. Suppose people want to buy more of a good when incomes rise.

Normal good: When an increase in income causes an increase in demand.  .  Inferior good: When an increase in income causes a decrease in demand.

000? demand @ I = \$1000 quantity Market for pizza Go to hidden slide .own price What’s the effect on the demand curve for pizza if income rises to \$2.

000? demand @ I = \$1000 quantity Market for pizza Go to hidden slide slid e 11 .own price What’s the effect on the demand curve for pizza if income rises to \$2.

Substitutes: Two goods are substitutes if an increase in the price of one of them causes an increase in the demand for the other.  . an increase in the price of pizza would increase the demand for spaghetti if the goods were substitutes.  Thus.

own price What’s the effect of an increase in the price of pizza to \$15? demand @ pizza price of \$10 quantity Market for spaghetti Go to hidden slide .

 Thus.  .Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. an increase in the price of pizza would decrease the demand for beer if the goods were complements.

price of beer What is the effect on the market for beer of an increase in the price of pizza to \$15? demand @ pizza price of \$10 quantity Market for beer Go to hidden slide .

price of umbrella s What’s the effect on demand of it being a rainy day? demand on sunny days quantity Market for umbrellas Go to hidden slide .

and tastes. and tastes show up as shifts in the demand curve.  . prices of substitutes and complements.  Changes in own-price show up as movements along a demand curve.  Changes in income. prices of other goods. income. all else constant.  The demand curve shows demand as a function of a good's own price.Demand is a function of own-price.

Price elasticity of demand .

. The price elasticity of Demand The price elasticity of demand is a measure of the degree of sensitivity of demand to changes in the price.A general definition: “Elasticity” is a (standard) measure of the degree of sensitivity ( or responsiveness) of one variable to changes in another variable.

The Formula: Ped = % Change in Quantity Demanded ___________________________ % Change in Price If answer is between 0 and -1: the relationship is inelastic. Note: PED has – sign in front of it. because as price rises demand falls and vice-versa (inverse relationship between price and demand) . If the answer is between -1 and infinity: the relationship is elastic.

 Elastic – quantity changes by a lot when price changes even a little Inelastic – quantity changes by a little when price changes even a lot Unit elastic – quantity change = price change › price elasticity is less than one › price elasticity is greater than one    When calculating price elasticity of demand. you will always get a negativeWHY? › price elasticity equals one › For convenience we will take the absolute value .

Price Quantity Demanded .The demand curve can be a range of shapes each of which is associated with a different relationship between price and the quantity demanded.

-----d I Q EI = .A measure of the degree of responsiveness of demand (for a good) to a change in income. (Shift of the demand curve) Q2-Q1 Q2+Q1 I2-I1 I1+I2 d Q I = or = -----. ceteris paribus..

Py1 Py1+Py2 or = .Qx1 Qx2+Qx1 d Qx Py ----------.A measure of the degree of responsiveness of the demand for one good (X) to a change in the price of another good (Y): (Shift of demand curve) Qx2.. ------d Py Qx Ec = Py2.