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# Chapter 4: DEMAND.

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Chapter 4: DEMAND

Objectives Describe & illustrate the concept of demand. Explain how demand & utility are related. Explain what causes a change in quantity demanded Describe the factors that can cause a change in demand. Define & analyze the elasticity of demand for a product.

Ch 4 Key Terms demand demand schedule demand curve Law of Demand
marginal utility diminishing marginal utility change in quantity demanded income effect substitution effect change in demand substitutes complements elasticity demand elasticity elastic inelastic unit elastic

Demand is NOT just the desire to have or own a certain product
What is demand? Demand is NOT just the desire to have or own a certain product DEMAND is the DESIRE, ABILITY, and WILLINGNESS to BUY a product When I want or need something, do I demand it? No, I must buy it.

Analyzing Demand A demand schedule is a listing that shows the number demanded at different prices (table form) Price Quantity Demanded

The line is ALWAYS downward sloping
A demand curve shows the quantity demanded at each & every possible price that may prevail in the market (line graph form) The line is ALWAYS downward sloping Lower quantity will be demanded at higher prices Higher quantity demanded at lower prices A change in price reflects movement along the curve (change in quantity demanded)

There is an inverse relationship between price & quantity demanded
The Law of Demand There is an inverse relationship between price & quantity demanded If price increases, demand decreases If price decreases, demand increases

Demand and Marginal Utility
Utility is the amount of usefulness or satisfaction someone gets from the use of a product Marginal utility is the extra satisfaction one gets from getting one more unit of the product Diminishing marginal utility is the decreasing satisfaction as additional units of a product are acquired

CHANGE IN QUANTITY DEMANDED VS. DEMAND

Change in Quantity Demanded
A change in price will cause a change in the quantity demanded, which is represented by movement along the demand curve This may occur because of 2 reasons: The Income Effect: change in price alters consumers’ real income (prices drop, you have more income to spend) The Substitution Effect: change in the relative price of the product (as compared with prices of other products) Together, they explain why consumers increase consumption when prices drop

If a change in demand is NOT caused by a change in PRICE, the entire demand curve will shift = CHANGE IN DEMAND

Change in Demand People are now willing to buy different amounts of the product at the same prices Entire demand curve shifts To the RIGHT shows an increase in demand To the LEFT shows a decrease in demand Change in demand results in an entirely new curve

Factors that cause a change in demand (other than price):
Write at least 3 facts for each. Consumer Income Consumer Tastes Prices of Related Goods Substitute Goods Complementary Goods Change in Expectations Number of Consumers

Elasticity of Demand

Elasticity is an important cause-and-effect relationship in economics
Demand elasticity is the extent to which a change in price causes a change in the quantity demanded Will a change in price cause a relatively larger, a relatively smaller, or a proportional change in quantity demanded?

Demand is ELASTIC: a change in price causes a relatively larger change in quantity demanded
Demand is INELASTIC: a change in price causes a relatively smaller change in quantity demanded Demand is UNIT ELASTIC: a change in price causes a proportional change in quantity demanded

What determines demand elasticity?
Can the purchase be delayed? Yes: tends to be elastic No: tends to be inelastic Are adequate substitutes available? Does the purchase use a large portion of income?

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