Chapter 4 Notes Week of September 14, 2014

Chapter 4 Section 1 Notes Demand is a combination of desire, ability, and willingness to buy a product. Demand is a microeconomic concept. Microeconomics is the part of economics that studies small units, such as individuals and firms. Microeconomic concepts help explain how prices are determined and how individual decisions are made. In a market economy people and firms act in their own best interests to answer the basic WHAT, HOW, and FOR WHOM questions. An understanding of demand is essential if we are to understand how the economy works.

Section 1 Notes Continued.

Section 1 Notes Continued A demand schedule is a table that lists how much of a product consumers will buy at all possible prices. The demand schedule shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time. A demand curve shows the quantities demanded at all possible prices. A demand schedule and the demand curve are similar in that they both show the same information— one in the form of a table and the other in the form of a graph.

Section 1 Notes Continued The Law of Demand states that consumers will buy more of a product at lower prices and less at higher prices. There are two reasons why this is referred to as a “law.” One, the inverse relationship between price and quantity demanded is something that we find in study after study. Two, common sense and simple observation are consistent with the Law of Demand. We can note the higher purchases for a sale at the mall or a particular store when prices are lower. The market demand curve shows how much of a product all consumers will buy at all possible prices. A market demand curve is different in that it shows the demand for everyone in the market for a particular product.

Section 1 Notes Concluded Marginal utility is the extra usefulness or additional satisfaction a person gets from acquiring or using one more unit of a product. Diminishing marginal utility is the principle which states that the extra satisfaction we get from using additional quantities of the product begins to decline. This also explains why the demand curve is downward sloping. The demand for the product goes down after the second, third, and so forth of the product is purchased.

Section 2 Notes The “Companies in the News” segment talks about the changes McDonald’s made to the interiors of their restaurants. Now McDonald’s has decided to serve breakfast all day. How would this change demonstrate demand? There are two types of changes when it comes to demand—1) price of a product changing indicates a change in the quantity demanded. 2) the price stays the same but other factors change— perhaps consumers’ tastes or selections. QUESTION 2: A change in quantity demanded is a change in quantity demanded that occurs because of a change in price whereas a change in demand is a change in all the quantities demanded at all possible prices.

Section 2 Notes continued The INCOME EFFECT is a change in quantity demanded due to a change in the buyer’s real income when a price changes. Like the current drop in gas prices—people buy the same amount of gas (same vehicle) and have more money to spend on other things. The SUBSTITUTION EFFECT is the change in quantity demanded due to a price change that makes other products more or less costly. Renting a movie instead of going to one because the price of tickets or concessions goes up is one example.

Section 2 notes continued A CHANGE IN DEMAND is a shift of the demand curve when people buy different amounts at every price. A shift to the right shows an increase in demand whereas a shift to the left shows a decrease in demand. GRAPHIC ORGANIZER ANSWERS: Changes in the determinants of demand: 1) consumer income 2) consumer tastes 3) price of related goods 4) expectations 5) the number of consumers

Section 2 notes concluded SUBSTITUTES are competing products that can be used in place of one another. Butter instead of margarine or the other way around for example. COMPLEMENTS are products that increase the use of other products. Downloads of Microsoft 10 might increase onto older computers because new computers with Microsoft 10 installed might be too expensive.

Chapter 4 Section 3 Notes The “Companies in the News” section talks of Netflix’s rise in customers over Blockbuster. Today video stores are not as popular as streaming videos. Netflix has over 64 million subscribers world-wide and has competitors such as Redbox, Hulu, and Amazon to keep at bay. ELASTICITY is the measure of responsiveness that shows how one variable responds to change to another variable. DEMAND ELASTICITY is a measure that shows how a change in quantity demanded responds to a change in price. Demand becomes ELASTIC when a given change in price causes a relatively larger change in quantity demanded. We see demand elasticity in produce. Prices are generally lower in the summer when fresh produce is available at greater quantities. Once winter sets in produce prices go up and many buy canned or frozen produce.

4.3 Notes continued INELASTIC is a type of elasticity where a change in price causes a relatively smaller change in quantity demanded. The textbook uses table salt as an example of product that would have this type of demand elasticity. People only want so much salt (or very little) and price changes would not impact the demand that greatly. UNIT ELASTICITY is a type of elasticity where a change in price causes a proportional change in the quantity demanded. We generally don’t experience unit elasticity so examples were not available in your textbook. Question 2’s answer: Demand increases, decreases, or stays about the same.

4.3 Notes concluded Total expenditures are found by multiplying the price of a product by the quantity demanded for any point along the demand curve. Question 3’s answer: Total expenditures will rise or fall depending on the elasticity of demand for a product. GRAPHIC ORGANIZER: DETERMINANT:DESCRIPTION: Can the purchase be delayed?Yes=elastic demand; no=inelastic Are adequate substitutes Yes=more elastic demand available? Does the purchase use a largeYes=more elastic demand portion of income?