Download 9.5 demand - Amazon Web Services

CHAPTER 9 STUDY GUIDE
9.5 DEMAND
1. As we begin our study of demand, recall that demand represents consumer behavior, and that
the demand curve slopes down (demand = consumers = slopes down). Keeping this straight
in our minds will be enormously useful as we investigate supply and demand together on the
same graph. Demand = consumers = slopes down!
9.5.1 The Individual Consumer’s Demand Curve for Macaroni and Cheese in Pittsburgh
1. The individual consumer’s demand curve is derived using consumer theory from Chapter 7.
The derivation is really the same strategy that many businesses use to maximize profits, by
trial and error. In the example used to derive the individual consumer’s demand curve, we
held everything constant with the exception of the price of one good: macaroni and cheese.
Then, using data gathered from how much is purchased at each price, we can construct a
demand curve for an individual consumer. Think about a grocery store that places a good on
display at the end of the aisle. Grocery stores will often lower the price of a good such as
paper towels or a can of chili to see what will happen to quantity demanded. Goods placed in
this position are called “endcaps,” or a “feature.” If the price is lower than the cost of the
good, this strategy is called a loss leader.
9.5.2 The Market Demand Curve
1. As with the market supply curve above, the market demand curve represents “numerous”
consumers. This is a large number of buyers, and the market demand quantity is denoted,
“Q,” to distinguish it from the much smaller individual demand quantity of “q.” Graphs of
these two concepts can be the same size, but they signify largely different quantities.
9.5.3 The Law of Demand
1. The Law of Demand is one of the most important principles of economics. It is very simple,
but very powerful: if the price of a good increases, holding all else constant, quantity
demanded decreases. This is applied generously to a host of real-world market situations and
events. Keeping this Law in your memory will serve you well as you observe and interpret
things around you.
9.6 THE ELASTICITY OF DEMAND
1. The elasticity of demand is another one of the major “take-home lessons” of this course.
When consumers are responsive to price changes (elastic demand) and when they are not
(inelastic demand) is a useful and powerful concept.
2. The point elasticity of demand is for measuring price responsiveness at a single point, or for
small changes near a single point. The arc elasticity of demand is for discrete changes in
price, from one level to a different level.
3. The price elasticity of demand is related to but much different than the slope of the demand
curve, as we have seen in our study of supply above.
9.9.2 Income
1. One interesting applications of the impact of income on demand is what happens to consumer
purchases during a recession. During the Great Recession of 2008–2010, Walmart had large
profitability, whereas country club memberships and boat sales were drastically lower.
Consumers shifted out of luxury goods, and into necessities.
9.9.3 Tastes and Preferences
1. One of the most important economic principles to remember beyond this course is that in a
market economy, producers must, “give the consumers what they want” to remain profitable.
Consumer preferences are a moving target. As consumers become wealthier, they will desire
different goods and services, and different attributes of goods and services. The most
successful producers will be the ones who respond the quickest and best to changes in what
consumers want.