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
 Do Now: 2/25/20
• What do you think is the definition of
supply and demand?
 Look at this demand curve.
What happens to quantity purchased
as prices rise?
Why do we purchase more when a sale
occurs?
 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.
 The Law of Demand
• The law of demand is the basic
principle that consumers buy
more of a good when its price
decreases and less of a good
when its price increases.
It’s obvious, isn’t it? Consumers
love low prices.
 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.
It really depends on the price, doesn’t it?
 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.
• Lower prices allow consumers to
increase demand.
• Lower prices increase consumers’
purchasing power.
• A demand schedule records the
quantity demanded at various prices.
A demand schedule can easily be
converted to a demand curve.
• Economists love graphs because
graphs provide easy understanding of
economic concepts.
If a picture is worth a thousand words,
a graph is worth even more.
 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?