Lesson 2 - Law Of Demand

AP/ECON 1000 Lesson 2 Lecture Notes - Law of Demand Understanding the Law of Demand ● ● ● Definition: The Law of Demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases (and vice versa). In Other Words: When prices go down, people tend to buy more of a product, and when prices rise, they buy less. Example: If the price of a coffee at your favorite cafe drops from $5 to $3. Hence you might grab two cups instead of one because it's a better deal. Factors Influencing Demand ● ● ● ● ● Price: The most obvious factor affecting demand is the price of the product itself. Income: Changes in income can affect how much people are willing to spend. For normal goods, as income increases, demand increases. For inferior goods, demand decreases as income rises. Tastes and Preferences: Trends, fashions, and advertising can all influence consumer preferences, affecting demand. Substitutes: If a cheaper substitute becomes available, demand for the original product may decrease. Complements: Products that are used together, like hot dogs and buns, have a complementary relationship. If the price of one increases, demand for the other may decrease. Price Elasticity of Demand Price elasticity of demand measures how much the quantity demanded responds to changes in price. - Elastic Demand: When a small change in price leads to a big change in quantity demanded. Products with many substitutes usually have elastic demand. Inelastic Demand: When changes in price have little effect on quantity demanded. Products that are necessities or have few substitutes tend to have inelastic demand. AP/ECON 1000 Real-World Applications ● Luxury Goods vs. Necessities: Luxury goods like designer handbags often have elastic demand because people can easily switch to cheaper alternatives. Necessities like groceries tend to have inelastic demand because people need them regardless of price changes. ● Pricing Strategies: Understanding demand helps businesses set prices. For example, airlines often use dynamic pricing, raising prices when demand is high and lowering them when demand is low. Government Policies: Governments use knowledge of demand to levy taxes or subsidies. For instance, taxing cigarettes aims to reduce demand and improve public health. ● Exceptions to the Law of Demand ● ● Veblen Goods: Luxury items that people desire because of their high price, such as luxury cars or designer clothing, can defy the law of demand. Giffen Goods: Inferior goods for which demand increases as price rises due to their perceived status or quality, like certain types of inexpensive food during times of economic hardship. General Key Takeaways From The Lesson ● ● ● ● The Law of Demand states that as price decreases, quantity demanded increases (and vice versa). Factors such as income, tastes, substitutes, and complements influence demand. Price elasticity of demand measures how responsive quantity demanded is to changes in price. Understanding demand helps businesses set prices and governments formulate policies.