1. Demand

2. What is Demand? The Law of Demand
Demand: the desire for an item and the ability to pay for it
Law of demand: when price of good or service goes up, quantity demand goes down and vice versa

3. The Law of Demand Price & Demand
Law of demand explains consumer behavior as well as economic concept
Cheryl decides to spend money on DVDs
at $15 each, Cheryl demands 3 DVDs
at $5 each, she demands 7 DVDs

4. Demand Schedules
Demand schedule—a table lists how much of an item an individual will buy at each price
Market demand schedule—a table lists how much of an item all consumers will buy at each price

5. Demand Curves
Demand curve—a graph that shows amount of an item a consumer will buy at each price
Market demand curve—amount all consumers will buy at each price

6. What is Elasticity of Demand?
Elasticity of demand measures how responsive consumers are to price changes
Elastic—quantity demanded changes greatly as price changes
Inelastic—quantity demanded changes little as price changes

7. What Determines Elasticity?
Substitute Goods or Services
If no substitute for a product, demand tends to be inelastic ex. gasoline
If there are substitutes for a product, demand tends to be elastic ex. shoes
Necessity or Luxury
Necessity—something needed for life, demand is inelastic ex. prescription medications
Luxury—something desired but not essential, demand for luxuries tends to be elastic ex. BMW vs. Ford

8. Vera Wang: Designer Responding to Demand
Sophisticated wedding gowns not available for career women
Wang created line of wedding gowns to meet demand
Style became popular; other designers imitated
Wang created more demand for her style by designing other products

9. Reviewing Key Concepts
Explain the differences between the terms in each of these pairs:
demand and law of demand
demand schedule and demand curve
market demand schedule and market demand curve

10. What Factors Affect Demand?
Law of diminishing marginal utility: additional benefit of each additional unit declines as each unit is used
Income effect: amount people buy changes as purchasing power of their income changes
Substitution effect: amount people buy changes as they buy substitute products

11. Change in Quantity Demanded
change in amount consumers buy because of change in price
does not shift the demand curve itself

12. Change in Demand
Change in demand: caused by a change in the marketplace. It prompts people to buy different amounts at every price. Also causes shift in demand curve
When we shift the demand curve, we assume
ceteris paribus: everything else is held constant

13. Change in Income Causes Shift in Demand Curve
As incomes of most consumers in a market change, so does total demand
normal goods—demanded more when consumers’ incomes rise
inferior goods—demanded less when consumers’ incomes rise

14. Change in Population/Market Size Causes a Change in Demand
Demand for most goods changes as market size changes
rise in population leads to increased demand
decrease in population leads to decreased demand

15. Consumer Tastes/Advertising Causes a Change in Demand
Consumer tastes change; products gain and lose popularity
Consumers demand a greater amount of popular items at every price
Sellers advertise to create demand for products

16. Change in Consumer Expectations Cause a Change in Demand
Expectations about future price of items affect individual behavior
expected rise or fall in price can decide whether to buy now or wait
Expectations of all consumers in a market affect demand
Ex. because cars go on sale at end of summer, demand goes up then

17. Change in Price of Related Goods Causes a Change in Demand
Substitutes
products used in place of each other
if price of substitute drops, people buy it instead of original item
if price of original item rises, people will buy substitute
Complements
goods that are used together
-a rise in demand for one increases the demand for the other
-If price of one product changes, demand for both changes in same
way.
-If price of one rises, demand for both will drop

18. Reviewing Key Concepts
Explain the differences between the terms in each of these pairs:
change in quantity demanded and change in demand
income effect and substitution effect
normal goods and inferior goods
substitutes and complements

19. Total Revenue Test KEY CONCEPTS
Total revenue—amount of money company gets for selling its products
Formula: TOTAL REVENUE = P (price) x Q (quantity sold)
Total revenue test—shows total revenue from item at various prices
if total revenue increases after price drops, demand is elastic
if total revenue decreases after price drops, demand is inelastic

20. Reviewing Key Concepts
Use each of these terms in a sentence that gives an example of the term:
elastic
inelastic
total revenue

21. Case Study: Fueling Automobile Demand
Background
Demand for automobiles and all services connected with them is high
Car dealers want to sustain and increase demand for their product
What’s the Issue
How does demand affect your selection of a vehicle?
Thinking Economically
How would the demand for automobiles be affected by information presented in each of these documents? Support your answer with examples from the documents.
Identify and discuss the factors that affect elasticity of demand illustrated in these documents.
Explain how Documents B and C illustrate a cause and effect relationship in the demand for SUVs. Use evidence from these documents to support your answer.