Demand Chapter 3

What is demand? The willingness and ability to purchase a good or service Demand = Willingness and ability to purchase

The Law of Demand As a price of a good increases the quantity demanded of the good decreases and vice versa –Quantity Demanded – is there a difference between demand and quantity demanded? »A demand for popcorn »Buying the popcorn 2 bags for 1 dollar is quantity demanded

Opposite Directions Why do price and quantity demanded move in opposite directions? –Law of diminishing marginal utility Candy experiment –As you obtain less utility from additional units you will only buy large quantities at low prices

Demand Schedule Law of Demand says… –The up / down relationship is inverse relationship –A chart showing the inverse is a demand schedule

Demand Curve 3-1 b shows the demand curve –Plotting connected points to show patterns –There are almost always patterns in economics

What happens when said curve shifts? Demand curves shifting right or left show more or less demand of a product at price What causes these shifts?

Income As income goes up, people have the ability to purchase more of a good –This doesn’t necessarily mean they will Normal Good – income goes up, purchase of that good goes up Inferior Good – income goes up, purchase of that good goes down Neutral Good – income goes up, purchase of that good stays the same

Preferences People prefer certain products –Types of video games

Prices of Related Goods Substitute Goods –Cars – Coffee / Tea – Video Games Complements –Things that go together Balls / Bats PS2 / Games Cars / Tires

Number of Buyers Certain goods are demanded more in certain areas –Surfboards / CA v. SD

Change in Demand v. Change in Quantity Demanded A change in demand refers to a shift in the curve Change in quantity demanded = A movement from one point to another point on the same demand curve

Responsibilities of Buyers Researching Ethics in paying

Section 3 Elasticity of Demand –Relationship between percentage change in in quantity demanded and the percentage change in price % Change in quantity demanded Elasticity of demand = % Change in price

Demand Elastic demand – when quantity demanded percentage changes more than the price Inelastic demand – when quantity demanded percentage changes less than the price Unit Elastic demand – when quantity demanded and price have similar relationships

Determinants of Elasticity The number of substitutes has great effects on elasticity –Heart Medicines –Breads

Luxuries v. Necessities Luxury – don’t need it to survive Necessity – Food, medicine… –Which goods are elastic?

Percentages of Income Making budgets on any level, percent of income is studied Obvious which goods are more responsive to Relationship to Time –Changing to adapt and adjust over time

What does it matter? All versions of elasticity matter, because they relate to total revenue

Case 1 A rise in price does not necessarily mean a rise in revenue Elastic demand + Price rise = TR Decrease

Case 2 If demand is elastic and price is decreased, revenue will go up –Elastic Demand + Price Decline = TR Increase

Case 3 Inelastic demand + Price Rise = TR Increase If demand is inelastic a price rise will lead to a revenue increase

Case 4 If demand is inelastic and price declines, total revenue will decrease Inelastic demand + Price decline = TR Decrease

Unit Elastic Equal forces in opposite directions No change to total revenue