Chapter 4 Changes in Demand

Demand Shifts Determinants of Demand – factors that shift our demand curve – to the right or to the left Shift to the right = increase in demand by the consumers Shift to the left = decrease in demand by the consumers 5 determinants of demand

Determinants of Demand Consumer tastes and preferences Market size Income Prices of related goods Consumer expectations

Substitute Goods Goods that can be used to replace the purchase of similar goods when prices rise

Complementary Goods Goods that are commonly used with other goods. Example – peanut butter and jelly

Elasticity of Demand Chapter 4

Elasticity of Demand The degree to which changes in a goods price affect the quantity demanded by consumers. The demand for a product can be either inelastic or elastic.

Elastic Demand Exists when a small change in a goods price causes a major, opposite change in the quantity demanded. Not necessary Available substitute goods expensive

Inelastic Demand Exists when a change in a goods price has little impact on the quantity demanded. Necessary good Few substitute goods available inexpensive

Measuring Elasticity Easy way to measure the elasticity of an item is through the total revenue test. Total Revenue – By measuring the total revenue of a business before and after changes in the price, you can determine the elasticity of demand for that product.

Measuring Elasticity % change in QD %change in P Calculate % change by taking the difference of the two numbers and divide it the original starting number! Example – if QD changes from 12million to 14million and Price changes from 5 dollars to 3 dollars. 2/12 = .167 = .4175 2/5 .4

What does your answer mean? x>1 = elastic x<1= inelastic x=1= unit elastic