The Law of Demand says that a decrease in a goods 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

P2

D1 Q1 Q2

D2

CHANGE IN PRICE= change in quantity demanded

Q CHANGE IN OTHER= change in demand

The demand curve for any good shows the quantity demanded at each price, holding constant all other determinants of demand.
The DEPENDENT variable is the quantity

demanded. The INDEPENDENT variable is the goods own price.

 own pric e

A demand curve must look like this, i.e., be negatively sloped.

demand quantity demanded

Market for tacos

Suppose people want to buy more of a good when incomes rise, holding constant all other factors affecting demand, including the goods own price.

own price

$1/can

How does this affect the demand curve?

demand @ I = $1000
Market for beer

quantity of beer

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

own price

Whats the effect on the demand curve for pizza if income rises to $2,000?

demand @ I = $1000 quantity

Market for pizza
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own price

Whats the effect on the demand curve for pizza if income rises to $2,000?

demand @ I = $1000 quantity

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

own price

Whats the effect of an increase in the price of pizza to $15?

demand @ pizza price of $10

quantity
Market for spaghetti
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Complements: Two goods are complements if an increase in the price of one of them causes a decrease in the demand for the other. Thus, 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
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price of umbrella s

Whats the effect on demand of it being a rainy day?

demand on sunny days quantity

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

Price elasticity of demand

A general definition: Elasticity is a (standard) measure of the degree of sensitivity ( or responsiveness) of one variable to changes in another variable. 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.

The Formula:
Ped = % Change in Quantity Demanded ___________________________ % Change in Price

If answer is between 0 and -1: the relationship is inelastic. If the answer is between -1 and infinity: the relationship is elastic.
Note: PED has sign in front of it; because as price rises demand falls and vice-versa (inverse relationship between price and demand)

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

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

Price

Quantity Demanded

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

EI =

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- Qx1 Qx2+Qx1 d Qx Py ----------- . ------d Py Qx

Ec =
Py2- Py1 Py1+Py2

or =