Chapter 4 DEMAND

Section 1 What is Demand

The Law of Demand Demand is the desire to have some good or service and the ability to pay for it. There are many things you may want to do (cruise, new car, new house, etc.) but if you are unable to afford them then you do not have a demand for them. If you want an item and can afford to buy it then economists say you have a demand for an item. The law of demand states that when the price of a good or service falls consumers buy more of it, when it goes up consumers buy less of it.

Demand Schedules A demand schedule is a table that shows how much of a good or service an individual consumer is willing and able to purchase at each price in a market. A market demand schedule shows how much of a good or service all consumers are willing and able to buy at each market price in a market

Demand Curves A demand curve is a graph that shows how much of a good or service an individual will buy at each price A market demand curve shows the data found in the market demand schedule

What Factors Affect Demand ? Section 2 What Factors Affect Demand ?

More About Demand Curves Law of diminishing marginal utility is the reason for a downward slope on a demand curve stating that the marginal benefit from using each additional unit of a good or service during a given period of time tends to decline as each is used. Example the more you drink water the less you demand it Why do consumers demand more goods and services at lower prices and fewer at higher prices? Income effect – purchasing power or you will only spend what money you can afford to spend Substitution effect – you can buy a substitute product or off brand that is equal to the main product at a lower price

Change in Quantity Demanded A change in quantity demanded is shown by a new point on the demand curve. It does not shift the demand curve itself

Change in Demand A change in demand can occur when there is a change in the market place This can actually change the shift in the demand curve Example high unemployment (or change in income) Market size – number of consumers increases or decreases Consumer tastes – consumers wants change in time Consumer expectations – expectations change as time passes Substitute Goods – same good but at a cheaper price (off brand) Complimentary Good – When 2 products compliment each other (CD to CD player, Phone to Phone service, etc.)

What is Elasticity Demand? Section 3 What is Elasticity Demand?

Elasticity of Demand Elasticity to demand describes how responsive consumers are to price change in the market place Demand is either elastic or inelastic Elastic – a change in price be it up or down leads to a relatively larger change in quantity demanded Inelastic Demand – a change in price leads to a small or no change in quantity demanded. Example is stretchy pants verse non stretchy pants

Elasticity of Demand

What Determines Elasticity ? Substitute Goods or Services If a good has no substitute then the demand is inelastic Gas, insulin, If there is a substitute then demand is elastic Types of food, types of tv services

What Determines Elasticity ? Proportion of Income The percentage of income you spend on a good or service can determine elasticity Necessities vs Luxuries Necessity something you must have vs a luxury something you want to have but don’t have to have. Necessities are inelastic for the most part Luxuries are elastic

Calculating Elasticity of Demand Elasticity of demand helps businesses to understand if they need to make price cuts or not If demand is elastic then price cuts will help if it is inelastic then price cuts won’t help In order to determine elasticity economists use the following formula: Percentage change in quantity demanded is greater than the percentage change in price

Total Revenue Test A sellers Total Revenue is calculated by a measure of elasticity demand. TOTAL REVENUE = P (PRICE) X Q (QUANTITY SOLD) The total revenue test is where you offer a product at various prices to see how people react to it. IF the demand for the product increases after the price drops then it is elastic IF the demand for the product does not increase after the price drop than it is inelastic