12th Economics Chapter 4 Section 1 Demand 12th Economics Chapter 4 Section 1

Demand Demand – the desire to own something and the ability to pay for it.

Demand The law of demand – consumers buy more of a good when its price decreases and less when its price increases. If the price of SUVs goes up people will buy … more / less SUVs. If the price of pizza goes down people will buy … less / more pizza. The law of demand is the result of two behavioral patterns that overlap.

Demand Substitution Effect – when consumers react to an increase in a good’s price 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 Individual Demand Schedule – a table that lists the quantity of a good a person will but at each different price. Market Demand Schedule – a table that lists the quantity of a good all consumers in a market will but at each different price.

Individual Demand Schedule Price of a slice of pizza Quantity demanded per day $.50 5 $1.00 4 $1.50 3 $2.00 2 $2.50 1 $3.00

Market Demand Schedule Price of a slice of pizza Quantity demanded per day $.50 300 $1.00 250 $1.50 200 $2.00 150 $2.50 100 $3.00 50

Demand Demand Curve – a graphic representation of a demand schedule. The demand curve shows only the relationship between the price of the good and the quantity that will be purchased. It assumes all other factors that may influence demand (price of other goods, income, or quality of the good) are held constant. All demand schedules and curves reflect the law of demand.

Individual Demand Curve

Market Demand Curve

Shifts of the Demand Curve Chapter 4 Section 2

Causes of a shift in demand ***A change in the price of a good DOES NOT cause a change in the demand curve. Income Consumer Expectations Population Tastes and Advertising

Income A customer’s income may change the demand curve b/c most items we purchase are normal goods normal goods – (a good that consumers demand more of when their income increases) Inferior goods – (a good that consumers demand less of when their income increases) (Example: generic cereals or used cars)

Income An increase in income would cause the demand curve to shift to the right b/c for each of the prices on the vertical axes the quantity demanded would be greater. (Increase Demand) In contrast, a decrease in income would cause a shift in the curve to the left. (Decrease Demand)

Consumer Expectations The current demand for a good is positively related to its future price. If you expect the price to rise, your current demand will rise, meaning you will buy the good sooner. If you expect the price to decrease, you current demand will drop, and you will wait for the lower price.

Population Changes in the size of the population will affect the demand of certain products. For example, when soldiers returned from WWII, record numbers of them married and had children causing an increase in demand for baby products, producing the generation known as the “Baby boomers”

Consumer Tastes and Advertising Changes in taste and preferences cannot be explained by changes in income or population. Advertising is considered a factor that shifts demand curves b/c it plays an important role in trends.

Elasticity of Demand Chapter 4 Section 3

Elasticity of Demand Elasticity of Demand – a measure of how consumers react to a change in price. (the way consumers respond to price changes.)

Elasticity of Demand Inelastic – describes demand that is not very sensitive to a change in price. Your demand for a good that you will keep buying despite an increase in price. Examples: Prescription Drugs, Milk, Electricity Elastic – describes demand that is very sensitive to a change in price. You buy much less of a good after a small price increase. Examples: Cars, Bread, Jeans

Calculating Elasticity Take the percentage change in the demand of a good, and divide this number by the percentage change in the price of the good.

Calculating Elasticity Percentage change in quantity demand Percentage change in Price

Calculating Elasticity Percentage Change = Original Number – New Number x 100 Original Number

Calculating Elasticity Price Decreases from $4 to $3, a decrease of 25%. $4 - $3 x 100 = 25 $4 Quantity demanded increases from 10 to 20, 100% 10 – 20 x 100 = 100 10 *** Elasticity is greater than 1,so demand is elastic. Elasticity of demand is 4.0. 100% = 4.0 25%

Elasticity of Demand If elasticity is greater than one, the demand is elastic. If elasticity is less than one, the demand is inelastic. If elasticity is equal to one, the demand is unitary elastic. Unitary elastic – describes demand whose elasticity is equal to one.

Factors Affecting Elasticity Availability of Substitutes Relative Importance Necessities vs. Luxuries Change over Time

Availability of Substitutes If there are few substitutes for a good, then even though the price rises greatly, you may still buy that good. For example, if your favorite band is giving a concert, there really is no substitute no matter the price of a ticket.

Relative Importance How much of your budget do you spend on one good. For example, if you spend half of your budget on a prescription drug that you can’t live without and the price of that drug goes up you will have to drastically cut back on other goods.

Necessities vs. Luxuries Whether a person considers a good a necessity or a luxury. For example, a cell phone may be considered a necessity to you and you will continue to pay for that cell phone even if the price increases. However for me, if the price of my cell phone goes up I may talk less or discontinue my use of the phone all together. Because it is easy to reduce the quantity of luxuries demanded, the demand is elastic.

Change over Time When a price changes, consumers often need time to change their shopping habits. Because they cannot respond quickly to price changes, their demand is inelastic in the short term.

Total Revenue Read Pages 95-96 for the test.