Chapter 4 DEMAND

Section 1 Understanding Demand Demand-the desire to own something & the ability to pay for it. Law of Demand-customers buy more of a good when its price decreases and less when its price increases

Law of Demand

Substitution Effect When consumers react to an increase in the price of a good by consuming less of that good and more of other goods.

Income Effect The change in consumption resulting from a change in real income.

Demand Schedule A table that lists the quantity of a good a person will buy at each different price.

Ceteris Paribus Latin phrase meaning all things held constant!

Causes of Shifts in the Demand Curve Income Consumer Expectations Population Consumer Tastes Advertising

Elasticity of Demand A measure of how consumers react to a change in price.

Inelastic Describes demand that is not sensitive to a change in price.

Elastic Describes demand that is very sensitive to a change in price.

Factors that Influence Elasticity Price Range Values of Elasticity Availability of Substitutes Relative Importance Necessity vs. Luxury Changes Over Time

Unitary Elastic Demand whose elasticity = 1 Example: Arizona Iced Tea .99, elasticity of demand is unitary at 99 cents The price increases to $1.98-What will happen to the demand? It will decrease by 50%

Elasticity & Revenue Elasticity of demand determines how the change in price will affect a company’s total revenue or income.

The Man In Black

Do Now Page 83 #1-6 Page 88 #1-9 Page 96 #1-7