Ch 4

Free Market In a Market System the interaction between buyers and sellers determine prices of most goods and the quantity of products produced. Demand- the desire to own something and the ability to pay for it. Law of Demand-when price is lower, consumers will buy more of it. When the price is high, consumers buy less of it.

Law of Demand is the combination of two patterns of behavior… Substitution Effect and Income Effect Substitution Effect- Consumers reaction to a rise in the price of one good by consuming less that good and more of a substituted good. Income Effect- When prices rise and our income stays the same the consumer feels poorer. Therefore, they will not buy as much of a certain good but not replace it with an alternative good.

A Demand for a good means you must be willing and able to buy it at the specified price Demand Schedule-a table that lists the quantity of good that a person will purchase at each price in the market. See pg 81. Business owners find the Demand Schedule chart very helpful.

Market Demand Schedule- shows quantity demand at each price by all consumers in the market. For example- it would allow a restaurant owner to predict the total sales of pizza at several different prices. Demand Curve- Can be used to predict how people will change their buying habits when the price of a good rises or falls.

Analysis of Change in Demand When only the price of a good is taken into account it is called ceteris paribus, the Latin phrase for “all other things held constant” Therefore the Demand Schedule would only show the change in price as a factor. However, in reality there are generally multiple factors that cause a change in demand of a product besides just the price. When the ceteris paribus rule is dropped and other factors are analyzed the entire demand curve shifts. When the entire curve shifts it is known as a change in demand

Reasons for the shift of the Demand Curve…

Elasticity of Demand Elasticity of Demand is the study of the products that will be bought regardless of price vs products that are consumed based on price. Inelastic-demand for a good that you will keep buying regardless of price increase. Elastic-buying less of a good even if the price increase is small.

To compute elasticity of demand, take the percentage change in demand of a good and divide this number by the percentage change in the price of the good. Elasticity= Percentage change in quantity demanded Percentage change in price

Price Range- The elasticity of demand for a good varies at every price level. Demand for a good can be highly elastic at one price and inelastic at a different price. Ex- price change from.20 cents to.30 cents is easier to take verses $4.00 to $6.00. Even though both price points increased at the same rate of 50% -less consumers would purchase the product at a price increase of $2.00 verses.10 cents

Factors Affecting Elasticity Demand for some goods are more elastic than others. To determine what goods are inelastic and what goods are elastic one must determine what is essential and what is not. - If there are few substitutions for goods then the product is less elastic - Life saving medicine is inelastic However, if there are ample substitutions for a product then the product is more elastic

Another factor of elasticity is how much of your budget is spent on the product. If you already spent a substantial portion on a product and the price increases then 1) something else in your budget would have to take a cut or 2)you would scale back on the product and consume less. Your decision will determine how elastic the product is

Necessity vs Luxury- Necessity is a good people will always buy (inelastic) Luxury is something not necessary and purchases will vary based on price( elastic)

Elasticity is important to the study of economics because elasticity helps us measure how consumers respond to price changes for different products. Total Revenue is the amount of money the company receives by selling its goods

The law of demand tells us that an increase in price will decrease the quantity of demanded. When a good has an elastic demand, raising the price will decrease the units sold. For example if price increases 20% the units sold could decrease as much as 50% or more. This would reduce the companies total revenue.

Likewise, if you reduce the price the units sold could increase However- if the product is inelastic the raise in price will not change drastically the amount of units sold. All of this data helps business determine the elasticity or inelasticity of their product to the consumer