1. Ch. 4: Demand

2. Section 1: Understanding Demand
Consumers shape markets through their demands.

3. Demand
Demand: the desire to own something and ability/willingness to pay for it.
Consumer demand dictates what is produced.

4. Law of Demand
Cost
Demand
Cost
Demand
Law of demand: when a good’s price is lower, consumers will buy more. When the price is higher, consumers will buy less.

5. Substitution Effect
Substitution effect is when consumers react to an increase in price by purchasing more alternative (cheaper) products.
If pizza goes up in price, people buy more hamburgers and less pizza.

6. Income Effect
Income effect is when consumers demand less because of a change in real income.
If all clothing prices rise, and your income does not, you will consume/demand less clothing.

7. Price of a slice of pizza Quantity of slices demanded
Demand Schedule
Price of a slice of pizza
Quantity of slices demanded
$.50 5
$1.00 4
$1.50 3
$2.00 2
$2.50 1
Economists chart demand by creating a demand schedule: a table that lists demand levels at different prices.

8. Market Demand Schedule
Price of a slice of pizza
Quantity of slices demanded
$.50
5 million
$1.00
4 million
$1.50
3 million
$2.00
2 million
$2.50
1 million
A market demand schedule charts demand levels for an entire economy.

9. Demand Curve
Demand curves plot the data from demand schedules onto a graph.

10. Creating our own demand schedule
How much are you willing to pay for an ipad?

11. Thinking about demand
Why might the law of demand only apply in a free market economy?
What about a centrally planned economy?

12. Section 2: Shifts in the Demand Curve
Demand Curves can change as the result of many different circumstances.

13. Why does demand change?
Excluding price, what kind of circumstances, events, or environments might cause demand to shift?

14. Why does demand change? Factors that can shift demand…
Economic projections
Popularity
Weather
Consumer taste
Advertising
Changes in income

15. Ceteris Paribus
Ceteris paribus: Latin for, “all other things held constant.”
Demand curves take only price into account, holding all other things constant.
Many other factors, beside price, affect demand.

16. Shifts along the curve
Shifts along the curve happen as a result of price

17. Shifting the curve
Factors beyond cost, however, can cause the entire curve to shift (greater or less demand at every price).

18. Curve Shifts
The curve can shift out (right/up) with increased demand at all prices, or back (left/down) with decreased demand.

19. Types of goods
Normal goods: goods consumers demand more of when their income increases
Inferior goods: goods that consumers demand less of when their income increases
Examples?

20. Changes in demand Thousands of simultaneous factors influence demand.
Consumer expectations: economic forecasts, perception of value changes
Populations: Baby boomers
Consumer tastes and advertising: what is “in”?

21. Related Goods Complements: two goods that are used together.
Substitutes: goods that are used in place of one another.
Examples?

22. Section 3: Elasticity of Demand
Price changes affect demand for some goods/services more than others.

23. Elasticity of demand
Elasticity measures how consumers react to changes in price.

24. Cost/Demand What would you still demand, regardless of price change?
What would you quickly stop demanding, with even a small price change?

25. Inelastic Demand
Inelastic demand is relatively unresponsive to a change in price (demand does not stretch).
Examples: food, fuel, electric, clothing, healthcare

26. Elastic Demand
Elastic demand is very sensitive to a change in price (demand stretches).
Examples: nonessential products

27. Demand Curve for Elastic Good
An elastic curve is flatter, since demand is more responsive to cost.

28. Demand Curve for Inelastic Good
An inelastic demand curve is steep, because the demand isn’t as responsive to cost

29. Necessities vs. Luxuries
Is this good/service a necessity to survive, or a luxury?

30. Availability of Substitutes
Are there easy, available substitutes for this product?

31. How elastic is the demand for…
Rank the elasticity for the following things…

32. Elasticity and Revenue
Price of a slice of pizza
Quantity of slices demanded
Total Revenue
$.50
300
$150
$1.00
250
$250
$1.50
200
$300
$2.00
150
$2.50
100
$3.00 50
Total Revenue: amount of money a company receives for selling their goods/services.
Revenue is impacted by the elasticity of demand

33. Elasticity of Revenue
If demand is elastic, raising the price will decrease total revenue (and vice-versa).
If demand is elastic, raising the price will increase total revenue (and vice-versa).
Elastic Demand
Inelastic Demand
Price
Revenue
Price
Revenue