1. Chapter 4 DEMAND

2. What is Demand?  - The desire for an item and the ability to pay for it  Law of Demand:  - When price of good or service goes up, quantity demand goes down  - when price of good or service goes down, quantity demand goes up

3. Example of Price and Demand  Law of demand explains consumer behavior as well as economic concept  Cheryl decides to spend $45 on DVDs  - At $15 each, Sarah demands three DVDs  - At $5 each, she demands nine DVDS

4. Demand Schedules  Demand schedule—a table that summarizes one consumer’s behavior  — lists how much of an item an individual will buy at each price  Market demand schedule—a table that summarizes all consumers’ behavior  — lists how much of an item all consumers will buy at each price

5. Individual Demand Schedule  Demand schedule is a two-column table  — left-hand column lists various prices of a good or service  — right-hand column gives quantity demanded at each price

6. Example of Market Demand Schedule  Business owners need information about consumer demand  — helps them price goods to get the most sales  Market research—gather and evaluate data about customer preferences  Market demand schedule similar to individual demand schedule  — except quantities demanded are larger  — market demand also depends on price

7. Demand Curves  Demand curve—a graph that shows amount of an item a consumer will buy at each price  Market demand curve—amount all consumers will buy at each price  Demand curves graphically show information found on demand schedules

8. Individual Demand Curve  Demand curve is visual representation of law of demand  — assumes all economic factors except price stay the same  Vertical axis shows prices  Horizontal axis shows quantities demanded  Demand curves slope down from upper left to lower right

9. Market Demand Curve  Market demand curve constructed same way as individual demand curve  Market demand curve includes all consumers of a product  — quantities demanded are much larger than on individual demand curve  Illustrates inverse relationship between price and quantity demanded  — assumes all economic factors constant except price

10. Reviewing Key Concepts  Explain the differences between the terms in each of these pairs:  demand and law of demand  demand schedule and demand curve  market demand schedule and market demand curve

11. What Factors Affect demand?  KEY CONCEPTS  Law of diminishing marginal utility  — marginal benefit of each additional unit declines as each unit is used  Income effect  — amount people buy changes as purchasing power of their income changes  Substitution effect  — amount people buy changes as they buy substitute products

12. Group Activity  How Advertising Influences Consumer tastes.  Create a chart and discuss personal experiences with advertising, recall advertising messages that you have seen or heard in the past couple days.  Make a chart about the ads, listing the product, where you saw/heard it (radio, tv, internet, etc.) and the way the ad sought to create demand. Which ads were most effective and why?  You have 20 minutes to complete the chart to share in class!!

13. Change in Quantity Demanded  Change in quantity demanded  — change in amount consumers buy because of change in price  — each change shown by new point on demand curve  — does not shift the demand curve itself

14. Change in Demand  Change in demand is caused by a change in the marketplace  — prompts people to buy different amounts at every price  — also called shift in demand  Six factors can cause change in demand

15. Factor 1 Income  A person’s ability to buy goods changes as his or her income changes  As incomes of most consumers in a market change, so does total demand  — normal goods—demanded more when consumers’ incomes rise  — inferior goods—demanded less when consumers’ incomes rise

16. Factor 2 Market Size  As number of consumers in an area changes, so does market size  Demand for most goods changes as market size changes  — rise in population leads to increased demand  — decrease in population leads to decreased demand

17. Factor 3 Consumer Tastes  Consumer tastes change; products gain and lose popularity  Consumers demand a greater amount of popular items at every price  Sellers advertise to create demand for products

18. Factor 4 Consumer Expectations  Expectations about future price of items affect individual behavior  — expected rise or fall in price can decide whether to buy now or wait  Expectations of all consumers in a market affect demand  — example: because cars go on sale at end of summer, demand goes up then

19. Factor 5 Substitutes  Substitutes—products used in place of each other  — if price of substitute drops, people buy it instead of original item  — if price of original item rises, people will buy substitute

20. Factor 6 Complements  Complements—goods that are used together  Rise in demand for one increases the demand for the other  If price of one product changes, demand for both changes in same way  — if price of one rises, demand for both will drop

21. Elasticity of Demand  KEY CONCEPTS  Buying habits affected by type of product and importance to consumer  Elasticity of Demand  — measure of how responsive consumers are to price changes  — Elastic—quantity demanded changes greatly as price changes  — Inelastic—quantity demanded changes little as price changes

22. Elasticity of Demand  EXAMPLE: Elasticity of Demand for Goods and Services  Goods with substitutes have elastic demand since choices are available  Needed goods without substitutes have inelastic demand  Elasticity changes if substitutes created or goods taken off market  Unit elastic—same percentage change in price and quantity demanded  — useful concept for determining elasticity of demand

23. What Determines Elasticity?  - Three factors affect elasticity of demand  -Availability of substitutes  - Proportion of income spent on good or service  -Whether product is a necessity or luxury

24. Factor 1 Substitute Goods or Services  If no substitute for a product, demand tends to be inelastic  — when price of insulin goes up, diabetics still need the same amount  If there are substitutes for a product, demand tends to be elastic  — when price of beef goes up, consumers can buy other meats

25. Factor 2 Proportion of Income  Demand for expensive items tends to be elastic  — if percentage of income needed to buy item increases, demand decreases  Demand for inexpensive items tends to be inelastic  — rise in price requires small additional part of income  Rise in income can lead to greater demand for some goods or services

26. Factor 3 necessity or Luxury  Necessity—something needed for life  — demand for necessities is inelastic  Luxury—something desired but not essential  — demand for luxuries tends to be elastic

27. Calculating Elasticity of Demand  Knowing elasticity of demand tells sellers whether to cut prices  — if demand is elastic, price cuts might increase earnings  — if demand is inelastic, price cuts will not increase earnings  formulas used to calculate elasticity  — Is change in quantity demanded greater than change in price?

28. Total Revenue Test  Total revenue—amount of money company gets for selling its products  — Formula: TOTAL REVENUE = P (price) x Q (quantity sold)  Total revenue test—shows total revenue from item at various prices  — if total revenue increases after price drops, demand is elastic  — if total revenue decreases after price drops, demand is inelastic

29. Example: Revenue Table  Revenue table shows elasticity of demand by listing  — prices at which item can be sold  — quantity of item demanded at each price  — total revenue received from sale of item at each price

30. Quiz Review  Know Individual demand and market demand schedules  Know all key terms from chapter 4  Six factors that cause a change in demand (section 2)  Elastic vs Inelastic  Look at figures 4.1, 4.2, 4.6, 4.12  10 questions  7 Multiple choice, 2 short response, and 1 extended response.

31. Case Study  Turn to page 124-125 in your textbook.  Fueling Automobile Demand  Read articles A,B and C and answer the question after each article.  Then answer the 3 Thinking Economically Synthesizing questions after article 3. You are answering 6 total questions!!  Due today at end of period for a grade!