# Section 1 Understanding Demand

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Section 1 Understanding Demand
Chapter 4 Demand Section 1 Understanding Demand

Demand The desire to own something, the ability to pay for it, and the willingness to purchase it. Each individual point on a demand curve is a quantity demanded. The whole curve is Demand Price Quantity

Changes in Quantity Demanded
We hold all other factors affecting your buying habits constant (Ceteris paribus). We then look at how consumers react to changes in prices. This is shown graphically by a movement along the curve to a different quantity.

The Law of Demand The Law of Demand says that:
when a good’s price is lower, consumers will buy larger quantities. when a good’s price is higher, consumers will buy smaller quantities.

Increase in Quantity Demanded
\$3.00 \$2.50 \$2.00 \$1.50 \$1.00 \$.50 . Price .

Decrease in Quantity Demanded
\$3.00 \$2.50 \$2.00 \$1.50 \$1.00 \$.50 . Price .

Quantity demanded goes up.
The Law of Demand As prices go down……. Quantity demanded goes up.

Quantity demanded goes down.
The Law of Demand Quantity demanded goes down. As prices go up…….

Law of Demand Explained
Law of Demand is a result of two behavior patterns: The substitution effect The income effect

The Substitution Effect
Consumers react to an increase in a good’s price by consuming less quantities of that good and more of other goods. Example: As the price of beef goes up, people will purchase more chicken.

The Income Effect The change in consumption resulting from a change in purchasing power. Higher price decrease our purchasing power, decreasing the quantities that we buy. Example: \$2.50 a gallon gas compared to \$3.50 a gallon gas

Demand Schedules A table that lists the quantity of a good consumers will buy at each and every price in the market.

Individual versus Market Demand Schedules
chart that lists the quantity of a good an individual consumer will buy chart that lists the quantity of a good all consumers in a market will buy.

Example of a Demand Schedule
Demand Schedules for Pizza Individual Demand Schedule Market Demand Schedule Price per slice Quantity Demanded per day \$.50 \$1.00 \$1.50 \$2.00 \$2.50 \$3.00 5 4 3 2 1 300 250 200 150 100 50

Example of a Demand Schedule
Demand Schedules for Pizza Individual Demand Schedule Market Demand Schedule Price per slice Quantity Demanded per day \$.50 \$1.00 \$1.50 \$2.00 \$2.50 \$3.00 5 4 3 2 1 300 250 200 150 100 50

Demand Curves A graphical representation of the demand schedule.
Each price is plotted on the vertical axis and each quantity is plotted on the horizontal axis.

Individual Demand Curve for Pizza

Market Demand Curve for Pizza

Shows the relationship between the price of the good and the quantity a person will purchase of that good. The curve slopes downward to the right. (Inverse relationship) Assumes other factors remain constant. (quality of the good, consumer incomes, prices of other goods)

Section 1 Assignment Ch. 4 Demand Section 1 Questions
Key Concept Questions pp. 79, 80, 81, 82, and 83 Section Review Question p. 83 #6

Section 2 Shifts of the Demand Curve
Chapter 4 Demand Section 2 Shifts of the Demand Curve

Changes in Demand We allow factors other than price to change (no Ceteris paribus). Consumers buy a different quantity than before at all prices. This is shown graphically by a shift of the demand curve to a new position.

. . Increase in Demand \$3.00 \$2.50 \$2.00 \$1.50 \$1.00 \$.50 Price

. . Decrease in Demand \$3.00 \$2.50 \$2.00 \$1.50 \$1.00 \$.50 Price

What Causes a Shift? When a factor other than price changes, the demand curve will shift. Changes in these “non-price determinants” of demand create a new level of demand at all prices.

“TIMER” Taste of consumers Income of consumers
Market size (number of consumers) Expectations of future prices Related good prices

Taste and Preference of Consumers (Direct for all goods)
As consumer taste increases…….. Demand for a good will increase.

Taste and Preference of Consumers (Direct for all goods)
As consumer taste decreases…….. Demand for a good will decrease.

Income of Consumers (Direct for normal goods)
As consumer income increases…….. Demand for normal goods will increase.

Income of Consumers (Direct for normal goods)
As consumer income decreases…….. Demand for normal goods will decrease.

Income of Consumers (Indirect for inferior)
Demand for inferior goods will decrease. As consumer income increases……..

Income of Consumers (Indirect for inferior)
As consumer income decreases…….. Demand for inferior goods will increase.

Market size (Direct) As market size increases……..
Demand for the good will increase.

Market size (Direct) As market size decreases……..
Demand for the good will decrease.

Expectations of Consumers (Direct)
If consumers expect prices to increase…….. Demand for the good will increase now.

Expectations of Consumers (Direct)
If consumers expect prices to decrease…….. Demand for the good will decrease.

Related Good Prices (Direct for substitutes) Butter/Margarine
Demand for the original good will increase. If the price of a substitute good increases……..

Related Good Prices (Direct for substitutes) Butter/Margarine
If the price of a substitute good decreases…….. Demand for the original good will decrease.

Related Good Prices (Indirect for complements) Hot Dogs/Buns
Demand for the original good will decrease. If the price of complementary good increases……..

Related Good Prices (Indirect for complements) Hot Dogs/Buns
If the price of complementary good decreases…….. Demand for the original good will increase.

Section 3 Elasticity of Demand
Chapter 4 Demand Section 3 Elasticity of Demand

Section 3 Objectives Explain how to calculate elasticity of demand.
Identify factors that affect elasticity.

Elasticity of Demand A measure of how drastically buyers will increase or decrease their quantity demanded of a good when the price rises or falls.

Inelastic Demand Consumers are not very sensitive to price changes and do not adjust their quantities demanded by very much. Examples: Medicine, gasoline, cigarettes, electricity.

Elastic Demand Consumers are highly sensitive to price changes and adjust their quantities demanded by a large amount.

Calculating Demand Elasticity
Original – New Original Percentage Change = X 100

. . Elasticity of Demand \$3.00 \$2.50 \$2.00 \$1.50 \$1.00 \$.50 Price

Calculating Demand Elasticity
Elasticity is determined using the following formula: Elasticity = Percentage change in quantity demanded Percentage change in price

Values of Elasticity If elasticity of demand is < 1, demand is inelastic. If elasticity of demand is > 1, demand is elastic.

Factors Affecting Elasticity
Availability of substitutes goods. % of budget spent on good. Perception of good as a luxury or necessity.