1. Chapter 4: Section 1 Understanding Demand
What Is Demand?
Markets are where people come together to buy and sell goods and services.
DEMAND is the buying side of a market.
SUPPLY is the selling side of a market.
Demand refers to the willingness and ability of buyers to purchase a good or service.
Both willingness and ability must be present; if either is missing, there is no demand.
Quantity demanded is different from demand. Quantity demanded is the number of units of a good purchased at a specific price. Quantity demanded is always a number. (write this in the margin)

2. What Does the Law of Demand “Say”?
The law of demand says that as the price of a good INCREASES, quantity demanded of the good DECREASES, and as price of a good decreases, quantity demanded of the good increases.
Quantity DEMANDED refers to the number of units of a good purchased at a specific price.
Basically, it says that when the price goes up, the quantity demanded goes down—and when the price goes down, the quantity demanded goes up.
Do you notice anything about the relationship between price and quantity demanded? They move in opposite directions.

3. The Law of Demand
Why is the law of demand important, and what does it mean to you? It shows that you, and other consumers, are willing to purchase fewer goods as the price goes up. And it shows that you are willing to purchase more goods as the price goes down.

4. Why Do Price and Quantity Demanded Move in Opposite Directions?
Price and quantity demanded move in opposite directions because of the law of DIMINISHING MARGINAL utility.
The law of diminishing marginal utility states that as a person consumes additional units of a good, the utility gained from each additional unit of the good DECREASES.
Diminishing means decreasing
Marginal means additional
Utility means satisfaction

5. A demand SCHEDULE is a numerical chart showing the law of demand.
The Law of Demand in Numbers and Pictures
We can actually show how the law of demand works by listing prices and quantities demanded in a table, and by plotting those numbers in a graph.
A demand SCHEDULE is a numerical chart showing the law of demand.
A demand curve is a(n) GRAPHICAL representation of the law of demand.

6. The Law of Demand in Numbers and Pictures
A(n) INDIVIDUAL demand curve represents and individual’s demand.
A(n) MARKET demand curve is the sum of all individual demand curves added together.

7. REVIEW QUESTIONS
Use the terms demand and quantity demanded correctly in a sentence about concert tickets.
Answers will vary.
Yesterday the price of a good was $10, and the quantity demanded was 100 units. Today the price of the good is $12, and the quantity demanded is 87 units. Did quantity demanded fall because the price increased, or did the price rise because quantity demanded fell?
The increase in price is the cause, and the fall in quantity demanded is the effect.

8. REVIEW QUESTIONS
What does the law of diminishing marginal utility have to do with demand?
The law of diminishing marginal utility states that individuals eventually obtain less utility from additional units of a good, so it follows that they will buy larger quantities of a good only at lower prices. The law of demand states that individuals will buy more of a good at lower prices.
Assume that the law of demand applies to criminal activity. What might community leaders do to reduce the number of crimes committed in the community.
Answers will vary. Students might mention that increasing the punishment for a crime (price) is likely to decrease people’s willingness to commit the crime (demand).

9. Chapter 4: Section 2 The Demand Curve Shifts
When Demand Changes, the Curve Shifts
Demand can change. It can go up, or it can go down.
A rightward shift means that demand has INCREASED.
A leftward shift means that demand has DECREASED.

10. What Factors Cause Demand Curves to Shift?
Five factors cause demand curves to shift:
Income.
A good for which demand rises as income rises and falls as income falls is a (n) NORMAL GOOD.
A good for which demand falls as income rises and rises as income falls is a (n) INFERIOR good.
If a person buys the same amount of a good when income changes, the good is a neutral good.
Preferences.
People’s PREFERENCES affect how much of a good they buy.

11. Prices of related goods.
With SUBSTITUTES, the demand for one good moves in the same direction as the price of the other good.
With COMPLEMENTS, the demand for one good moves in the opposite direction as the price of the other. Complements are goods used together.
Number of buyers. A change in the number of buyers, either an increase or a decrease, can change demand.

12. Future price.
Buyers who expect the price of a good to be HIGHER in the future may buy the good now. In this case, current demand for the good INCREASES.
Buyers who expect the price of a good to be LOWER in the future may wait and buy the good later. In this case, current demand for the good FALLS.

13. The only factor that affects quantity demanded is price.
What Factor Causes a Change in Quantity Demanded?
A change in quantity demanded refers to a movement ALONG a demand curve.
Only the PRICE of the good can directly cause a change in the QUANTITY DEMANDED.
The only factor that affects quantity demanded is price.

14. Chapter 4: Section 3 Elasticity of Demand
What Is Elasticity of Demand?
Elasticity is another term in economics that sounds more difficult to understand than it really is. It measures how a price change affects the quantity of a particular good that people want to buy.
Demand for a good can be elastic, inelastic, or unit-elastic. Elastic means that a price change has a significant impact on the quantity demanded. Inelastic means that there is a minor change in quantity demanded when the price changes. And unit-elastic means that the impact of a price change is neutral—that is, neither major nor minor. (See Transparency 4- 5.)

15. Elasticity of Demand

16. How do we find out which type of demand is at work
How do we find out which type of demand is at work? In all cases, the type of demand has to do with the relationship between the percentage change in quantity demanded and the percentage change in price.
When we divide the percentage change in quantity demanded by the percentage change in price, we get a number that is greater than 1, less than 1, or exactly 1.
If the answer to our division problem is greater than 1, the demand is elastic; if the answer is less than 1, the demand is inelastic; if the answer is exactly 1, the demand is unit- elastic.

17. Let’s look at some examples to see how we determine elasticity of demand.
Suppose the quantity demanded goes down by 15 percent and the price goes up by 10 percent. We divide 15 percent by 10 percent and get 1.5. Is this number greater than or less than 1? It’s greater than 1, so the demand is elastic.
Now let’s say that the quantity demanded goes down by 5 percent and the price goes up by 10 percent. We divide 5 percent by 10 percent and get 0.5. The answer is five-tenths, or one-half, so it’s less than 1, which means the demand is inelastic.

18. Determining Elasticity of Demand

19. Finally, let’s say that the quantity demanded goes down by 10 percent and the price goes up by 10 percent. We divide 10 percent by 10 percent and get 1. One is obviously equal to 1, so the demand is unit-elastic.
To summarize: If the answer is greater than 1, the demand is elastic, which means that a relatively small price change has a big impact on the quantity demanded. If the answer is less than 1, the demand is inelastic, which means that the price change has little impact on the quantity demanded. And finally, if the answer is exactly 1, the changes in price and quantity demanded are the same, and therefore the impact is neutral.

20. What Determines Elasticity of Demand?
Four factors affect the elasticity of demand:
Number of substitutes. When there are few substitutes for a good, the quantity demanded is unlikely to change much if the price rises. Therefore, the demand for the good is likely to be inelastic. When there are many substitutes for a good, the opposite is true: the demand tends to be elastic.
Luxuries versus necessities. Demand for necessities tends to be inelastic because people need those goods even if prices rise. Demand for luxuries tends to be elastic because people will often do without those goods if prices rise.

21. Percentage of income spent on the good
Percentage of income spent on the good. If a good requires a large percentage of a person’s income, demand for it tends to be elastic. Demand for goods that require a small percentage of a person’s income tends to be inelastic.
Time. When consumers have little time to respond to a price change, demand is usually inelastic. When they have more time to respond, demand is usually elastic.

22. Relationship Between Elasticity and Revenue
Elastic demand and an increase in price lead to a decrease in total revenue.
Elastic demand and a decrease in price lead to an increase in total revenue.
Inelastic demand and an increase in price lead to an increase in total revenue.
Inelastic demand and a decrease in price lead to a decrease in total revenue.