1. Chapter 4 Section 1
Demand

2. Chapter 4 Terms: Demand Microeconomics
The willingness to buy a product or service at a particular price
Microeconomics
Area of economics that deals with behavior and decision making by small units, such as individuals and firms.

3. Demand Schedule
Listing that shows the various quantities demanded of a particular product or service at all prices that might prevail in the market at a given time
Demand Schedule
Quantity Demanded
Price
$30
$25
$20 1
$15 3
$10 5 $5 8

4. Chapter 4 Terms cont: Demand Curve
Graph showing the quantity demanded at each and every price that might prevail in the market
$30
$25
$20
$15
$10 $5
Price 1 3 5 8
Quantity

5. Chapter 4 Terms cont: Law of Demand Market Demand Curve
States that the quantity demanded of a good or service varies inversely with its price
Market Demand Curve
Demand curve that shows the quantities demanded by everyone who is interested in purchasing the product

6. Individual and Market Demand Curves
Larry’s Demand Curve
Curly’s Demand Curve
Quantity
$30
$25
$20
$15
$10 $5
Price 1 3 5 8
Price
Quantity
$30
$25
$20
$15
$10 $5 1 3 5 7 2 + =
$30
$25
$20
$15
$10 $5
Price 1 6 10
Quantity 15 3
Market Demand Curve
Quantity of CDs Demanded by:
Price
Larry Curly = Market
$30
$25
$20
$15
$10
$ 5

7. Chapter 4 Terms cont: Marginal Utility Diminishing Marginal Utility
The extra “usefulness” or “satisfaction” a person gets from acquiring or using one more unit of product
Diminishing Marginal Utility
States that the extra satisfaction we get from using additional quantities of the product begins to diminish

8. End Chpt 4 Section 1

9. Chapter 4 Section 2
Factors Affecting Demand

10. Chapter 4 Section 2 Terms Change in Quantity Demanded
Movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price
$30
$25
$20
$15
$10 $5
Price
Quantity
Decrease in Quantity
Demanded a b
Increase in Quantity
Demanded 1 3 5 8

11. Chapter 4 Sec 2 terms cont. Income Effect Substitution Effect
Change in Quantity Demanded because of a change in price that alters consumers real income
Substitution Effect
Consumers react to actual change in the price of the product
Change in Quantity Demanded because of the change in the relative price of the product as opposed to other goods in the market

12. Chapter 4 Sec 2 terms cont. Change in Demand
Shift in the Demand Curve itself due to factors other than price
$30
$25
$20
$15
$10 $5
Price a a´ b b´ 1 4 7 12
Quantity 2 10 15

13. Causes of Change in Demand
Consumer Income
When incomes go up, consumers tend to demand more products and services
Consumer Tastes
Over time, consumer tastes change causing demand for certain products and services to change up or down
Substitutes
Change in Demand can be caused by change in price of similar products (Breakfast burritos price drops reducing demand for cereal)

14. Causes of Change in Demand
Compliments
Change in Demand can be caused by change in price of related products (Software prices drop creating demand for more computers)
Expectations
Perceptions about future advances in technology, population, preferences etc. can cause a change in Demand immediately due to speculation, anticipation or caution (Expectations that oil production will drop may lead to immediate stockpiling of gasoline)
Number of Consumers (population growth)
Increase in the number of consumers will naturally lead to an increase in Demand

15. End of Chapter 4 Section 2

16. Chapter 4 Section 3
Elasticity of Demand

17. Chapter 4 Sec 3Terms Elasticity Demand Elasticity
Measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price
Demand Elasticity
Extent to which a change in price causes a change in the quantity demanded

18. Chapter 4 Sec 3 Terms cont:
Elastic Demand
Change in price causes a relatively larger change in quantity demanded $4 $3 $2 $1 $0 1 2 3 4 5 D
CORN - Seasonal a b
From point (a) to point (b), Prices decline by 33% and quantity demanded increases by 100%
When % change in QD is relatively higher than % change in price,
Demand is said to be Elastic

19. Chapter 4 Sec 3 Terms cont:
Inelastic Demand
Change in price causes a relatively smaller change in quantity demanded $4 $3 $2 $1 $0 1 2 3 4 5 D a´
TABLE SALT b´
From point (a) to point (b), Prices decline by 33% and quantity demanded increases by 25%
When % change in QD is relatively smaller than % change in price,
Demand is said to be Inelastic

20. Chapter 4 Sec 3 Terms cont:
Unit Elastic Demand
Change in price causes an approx equal change in quantity demanded $4 $3 $2 $1 $0 1 3 4 5 D a´ b´
From point (a) to point (b), Prices decline by 33% and quantity demanded increases by 33%
When % change in QD is approx equal to the % change in price,
Demand is said to be Unit Elastic

21. Chapter 4 Sec 3 cont: Determining Elasticity Change In Price Change in
Expenditure
Movement of
Price and
Type of
Elasticity
Elastic
Unit Elastic
Inelastic
Opposite
No Change
Same

22. Total Expenditures Test for Demand Elasticity$4 $3 $2 $1 $0 1 2 3 4 5 D a b
CORN - Seasonal
Elastic Demand
Expenditure = $6 $4 $3 $2 $1 $0 1 2 3 4 5 D a b
Table Salt
Inelastic Demand
Expenditure = $6
Expenditure = $8
Expenditure = $5 $4 $3 $2 $1 $0 1 2 3 4 5 D a b
Unit Elastic Demand
Expenditure = $6
Type of
Elasticity
Change
In Price
Change in
Expenditure
Movement of
Price and
Elastic
Unit Elastic
Inelastic
No Change
Opposite
Same
Expenditure = $6

23. Total Expenditure Test
Looking at the impact of price changes on total expenditures, or the amount consumers spend on a product at a particular price

24. Elasticity and Profits
Don’t confuse revenue with profit!!!!!!
Fixed costs continue
Variable costs may increase resulting in lower profits.

25. Determinants of Demand Elasticity
Can the Purchase be Delayed?
Urgency creates Inelasticity
Allows for greater profits when price is increased
Are Adequate Substitutes Available?
Ability of consumers to “switch” back and forth between products such as butter and margarine
Creates Elasticity which reduces revenue when prices are increased

26. Determinants of Demand Elasticity
Does the Purchase Use a Large Portion of Income?
As percentage of consumer’s spendable income per purchase increases, the likelihood of purchasing more when the price increases is less
High percentage of spendable income creates an Elastic Demand situation