1. Economics Unit II: Microeconomics
Chapter 4: Demand
Did you know? In summer 1999, the American Automobile Association announced that gasoline prices in Illinois had reached a 20 month high. A spokesperson for the gasoline industry explained that this rise in prices had several causes, including unexpected problems at refinery plants and decisions from oil-producing countries to cut back on production. Regardless of reasons, it was expected that people living in Illinois would respond to higher prices by limiting the time they spend driving, thus reducing their demand for gas.

2. Economics Chapter 4: Demand
Why is it important to understand Demand?
A knowledge of demand is essential in understanding how a market economy works.
Knowledge of demand is also important for sound business planning.
**Lifestyle changes can create new market demand.

3. Economics Chapter 4: Demand
Demand is the desire, ability, and willingness to buy a product.
An individual demand curve illustrates how the quantity that a person will demand varies depending on the price of a good or service.
Draw a demand curve and schedule on the board

4. Economics Chapter 4: Demand
Economists analyze demand by listing prices and desired quantities in a demand schedule (chart).
When the demand data is graphed, it forms a demand curve with a downward slope.

5. Economics Chapter 4: Demand
1st left page Question #1:
Record the names and approximate prices of the last two items you purchased. In general, would you have spent your money differently if the price of each item was twice as high? Would you have spent your money differently if each of the items cost half as much as it did? Explain your response in complete sentences.

6. Economics Chapter 4: Demand
The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. When prices go up, the quantity demanded goes down; when price goes down, the quantity demanded goes up.

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A market demand curve illustrates how the quantity that all interested persons (the market) will demand varies depending on the price of a good or service.
Draw a market demand curve and schedule on board

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1st left hand page Question #2:
Why is price a consumer’s obstacle to buying? Explain your answer

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Marginal Utility is the extra usefulness or satisfaction a person receives from getting or using one more unit of a product.

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The principle of diminishing marginal utility states that the satisfaction we gain from buying a product lessens as we buy more of the same product.
Example is buying a soda. For each one you consume, your satisfaction or usefulness goes down.

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1st left hand page question #3:
What is another case in which more product gives less satisfaction? Explain your answer.

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Factors Affecting Demand
1. The change in the quantity demanded shows a change in the amount of a product purchased when there is a change in price.
In 1983, the first audio compact discs were introduced to U.S. consumers. Within 5 years, record companies had begun to phase out the vinyl albums on which music was traditionally played because sales figures had shown that consumers preferred CD technology.

13. Economics Chapter 4: Demand
The income effect means that as prices drop, consumers are left with extra real income.
The substitution effect means that price can cause consumers to substitute one product with another similar but cheaper item.

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2nd left hand page question #1: Imagine you have a weekly budget for groceries. When you shop one week, certain items you needed were on sale, and after you paid the cashier, you had $20 left. What would you do with the extra money? Explain

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2. A change in demand is when people buy different amounts of the product at the same prices.

16. Economics Chapter 4: Demand
A change in demand can be caused by a change in income (+/-), tastes, a price change in a related product (either because it is a substitute or complement), consumer expectations (future new technology or future rise in price or shortage), and the number of buyers (new and leavers).

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Substitutes: can be used in place of other products.
Example is butter and margarine
Generally, the demand for a product tends to go up if the price of its substitute price goes up and vice versa.

18. Economics Chapter 4: Demand
Compliments: related products that increase the value of each other; products related in such a way that an increase in price of one reduces the demand for both.
Example is computers and computer software.

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2nd left page Question #2:
Although CDs are by far today’s most popular form of musical recording, interest in vinyl albums is growing. What might happen to the demand for vinyl albums as interest increases? Explain.

20. Economics Chapter 4: Demand
Elasticity measures how sensitive consumers are to price changes.
Demand is elastic when a change in price causes a large change in demand.
The drugs needed to get or stay well can take a large portion of a consumer’s income, especially if that income is fixed. However, the use of generic drugs has offered consumers a cheaper alternative to drugs with brand names. After the founding drug company’s patent on a brand-name drug has expired, another drug company can create a generic drug.

21. Economics Chapter 4: Demand
Demand is inelastic when a change in price causes a small change in demand.
Demand is unit elastic when a change in price causes a proportional change in demand.

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2nd left hand page Question #3:
What are some examples of items for which an increase in price would cause you or your family to reconsider buying them? Give at least 3 examples and explain why you would reconsider buying them.

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The Total Expenditures Test
Price x quantity demanded = total expenditures

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Changes in expenditures depend upon the elasticity of a demand curve – if the change in price and expenditures move in opposite directions on the curve, the demand is elastic (↓ ↑) ; if they move in the same direction (↑ ↑ ), the demand is inelastic; if there is no change in expenditures, demand is unit elastic.
Pass out a copy of the chart “determining elasticity” from regular notes

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Understanding the relationship between elasticity and profits can help producers effectively price their products.

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3rd left page Question #1:
What are some examples of items for which a drop in price would not encourage you to buy more of an item? Give at least 3 examples and explain your reasons you would not buy more of it.

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Determinants of Demand Elasticity
Demand is elastic if the answer to the following questions are “yes.”
1. Can the purchase be delayed? (some purchases cannot be delayed, regardless of price changes).

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2.Are adequate substitutions available? (Price changes can cause consumers to substitute one product for a similar product).
3. Does the purchase use a large portion of income? (demand elasticity can increase when a product commands a large portion of a consumer’s income).
** Glue chart here **
Make copies of chart in chapter 4 notes on Determinants of demand elastic.

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3rd left hand page Question #2:
What are some things you buy for which price is not the issue? At least 3 examples. Explain why price is not an issue for each.

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4th left hand page Question 1:
Bring in an advertisement for a product. Glue it in your notebook. List things in the advertisement that appeal to you in the ad. Explain how the advertiser tries to get you to buy the product.

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The End