DEMAND UNIT 2: MICROECONOMIC CHAPTER 4

SEC. 1 WHAT IS DEMAND? What is Microeconomics? (individuals, business, organizations) What is Macroeconomics? (banking, government spending, labor wages, employment) What is Demand? - The desire, ability, and willingness to buy a product.

LAW OF DEMAND Quantity demanded of a good or service varies inversely with its price. - when the price goes up, quantity demanded goes down. - when the price goes down, quantity demanded goes up.

DEMAND SCHEDULE listing Is a listing that shows the various quantity demanded of a particular product at all prices that might prevail (succeed) in the market at a given time.

DEMAND CURVE graph A graph showing the quantity demanded at each and every price that might prevail in the market.

THE MARKET DEMAND CURVE Market Demand Curve- shows the quantities demanded by everyone who is interested in purchasing the product.

DEMAND AND MARGINAL UTILITY Marginal Utility- The extra useful or satisfaction a person gets from acquiring or using more unit of a product. Diminishing Marginal Utility- States that the extra satisfaction we get from using additional quantities of the product begins to diminish. - You get more satisfaction from the first product.

SEC. 2 FACTORS AFFECTING DEMAND Change in the Quantity Demanded Change in the Quantity Demanded: - A movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price.

WHY DEMAND CHANGE? Consumer Income -Is the change in quantity demanded because of a change in price that alters consumer’s real income. EX. When a product is on sale…people pay less, meaning we have extra money Consumer Tastes- when a product is advertise more people are going to end up liking the product Substitutes -Is the change in quantity demanded because of the change in the relative price of the product. EX: Replace costly items with less expensive/ Tea and Cofee, butter and margarine Complements: Ex. Computers and software Change in Expectations- how people think about the future # of Consumers- more people want to buy a product more demand

SEC. 3 ELASTICITY OF DEMAND  Elasticity-  Elasticity- The degree to which a demand or supply curve reacts to a change in price.  Tells us how a dependent variable such as quantity responds to a change in an independent variable such as price.  Demand Elasticity-  Demand Elasticity- Is the extend to which a change in price causes a change in the quantity demanded.

In economics demand is elastic, when a given change in price causes a relatively larger change in quantity demanded. Inelastic, means that a change in price causes a relatively smaller change in the quantity demanded. Unit elastic, means that a given change in price causes a proportional change in quantity demanded. (usually the % change in quantity is equal the percent change in price)

DETERMINANTS OF DEMAND ELASTICITY Elasticity- the extend to which a change in price causes a change in the quantity demanded. What makes the demand elastic or inelastic? -Three main questions:  Can the purchase be delayed?  Are adequate substitutes available?  Does the purchase use a large portion of income?

CAN THE PURCHASE BE DELAYED? Consumer’s need for a product cannot be delayed…. Inelastic because the quantity of the product demanded is not especially sensitive to changes in price. - Gas (same amount of gallons) - Insulin for diabetes/ Pills

ARE ADEQUATE SUBSTITUTES AVAILABLE? If substitutes are available people use them. (Less substitutes available more inelastic) - if price for beef and butter= chicken and margarine. - FedEx= U.S.P.S., however, they cannot increase prices due to technology.

DOES THE PURCHASE USE A LARGE PORTION OF INCOME? The amount of income required to make the purchase. If the purchase required a large amount of income, demand tends to be elastic. If the answer is no, then it is inelastic. Ex. Medial equipment, medications is usually inelastic.

THE TOTAL EXPENDITURES How can we determine elasticity? -Multiply the price of a product by the quantity demanded.