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Demand
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Objectives: Explain the law of demand. Describe how the substitution effect and the income effect influence decisions. Create a demand schedule for an individual and a market. Interpret a demand graph using demand schedules. Section 1: Understanding Demand
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One free Test Pass
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The desire to own something and be able to pay for it The law of Demand Consumers will buy more of a good when its price is lower and less when the price is higher Demand
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The Substitution Effect Consumers react to a rise in the price of one good by consuming less of that good and more of a substitute good The Income Effect The change in consumption that results when a price increase caused real income to decline Feeling richer or poorer
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Economists measure consumption not the amount of money spent to buy it
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To have a demand for a good, you must be willing and able to buy it at the specified price. Demand means that you want the good and can afford to buy it. You may desperately want a new car, a laptop computer, or a trip to Alaska, but if you can’t truly afford any of these goods, you do not demand them. Can I afford that?
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A table that lists the quantity of a good that a person will purchase at various prices A Demand Schedule
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Market Demand Schedules Table that lists the quantity of a good all consumers in a market will buy at various prices
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The Demand Graph Graphic Representation of a demand schedule
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Objectives: Explain the difference between a change in quantity demanded and a shift if the demand curve Identify the factors that create changes in demand and that can cause a shift in the demand curve. Give an example of how a change in demand for one good can affect demand for a related good. Section 2: Shifts in the Demand Curve
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Ceteris Paribus “all things held constant” Demand curves are only accurate as long as there are no other changes that could affect price EX: natural disasters Changes in Demand
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Moving from $2 to $3 = Movement is referred to as decrease in the quantity demanded (or increase in the quantity demanded)
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Income Normal goods – goods that consumers demand more of when their income increases Inferior goods – goods you would buy in smaller quantities, or not at all, if you income were to rise and you could afford something better
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Consumer Expectations Population Demographics – statistical characteristics of a population Age, race, gender etc. Consumer Tastes and Advertising
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Complements 2 goods that are bought and used together Substitutes Goods that are used in place of one another Prices of Related Goods
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Objectives: Explain how to calculate elasticity of demand. Identify factors that affect elasticity. Explain how firms use elasticity and revenue to make decisions. Section 3: Elasticity of Demand
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Elasticity of Demand Measure of how consumers respond to price changes Elastic Demand that is very sensitive to change Inelastic Demand that is not very sensitive to change Elasticity
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Take the percentage change in the quantity of the good demanded Divide this number by the percentage change in the price of the good = elasticity of demand Calculating Elasticity
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Law of demand implies that the result will always be negative Increase in price of a good will always be negative Why? Increase in the price of a good will always decrease the quantity demanded Decrease in price of a good will always increase the quantity demanded
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Price Range Values of Elasticity Less than 1 = inelastic Greater than 1 = elastic Exactly equal means unitary elastic
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Availability of Substitutes Life-saving medications? Relative Importance Shoelaces? Clothing if you spend 50% of your budget on clothes? Factors Affecting Elasticity
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Necessities v. Luxuries Milk? Steak? Change Over Time Vehicles?
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1. Availability of substitute goods 2. Limited budget 3. Perception of goods
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Computing a Firms Total Revenue Total revenue - amount of money the company receives by selling its goods 2 factors: 1. price of the goods 2. quantity sold Elasticity and Revenue
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Total Revenue and Elastic Demand Price increase can reduce total revenue
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Total Revenue and Inelastic Demand Raise prices Less demanded Greater revenue (higher price makes up for demand)
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Elastic or inelastic? Pricing decisions Elasticity and Pricing Policies
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