Chapter 4 DEMAND
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
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
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
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
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
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
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
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
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
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
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!!
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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?
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
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
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.
Case Study Turn to page 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!