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Chapter 4--Demand
What is Demand?
• Demand is the
desire to own
something and
the ability to
pay for it
What is Law of Demand?
The Law of Demand
The principle that, all
other factors being
equal, consumers will
purchase (demand)
more of a good or
service at lower prices
and less of a good at
higher prices
OPEC takes a lesson in Supply & Demand
• In 1973 a barrel of oil sold for $2.
– In 1981 a barrel sold for $30.
• In 1981 many OPEC nations wanted to
raise the prices even higher
– In addition to high prices, the world’s
consumption of oil had dropped 14% in the 2
years prior to 1981.
OPEC
• Because of the high prices, consumer
countries started conserving energy and
began using alternative energy such as coal
and natural gas as substitutes for oil.
• Because of the high price per barrel, many
OPEC countries had a tough time selling
their oil, and were forced to sell their surplus
at a lower price.
Income Effect:
The effect that a change in an item’s price
has on consumer’s ability to purchase
goods
Example: People who have money will buy
whatever they want. A rich person can
afford steak a fancy restaurant instead of
the average person buying a hamburger at
McDonalds or……………..
Good Seats—Nose bleed Seats
Substitution Effect
Consumers’ tendency to
substitute a lower priced good
for a similar, higher priced one
Example: Brand name products
vs. Generic Brands
Wrangler jeans vs. generic jeans
Kellogg's cereal vs. generic cereal
Complement Goods
• Complement
goods are
goods which
bought and
used together
– Buy a cell
phone—get
the case
Diminishing Marginal Utility
The natural
decreases in the
utility of a good or
service as more
units of it are
consumed
EXAMPLE: Buffet
Demand Curve
Demand Curve: A graphic representation of a demand
schedule showing the relationship between the price of an
item and the quantity demanded during a given period with
all things being equal
Demand Schedule
A table that
shows the level
of demand for a
particular item
at various prices
Demand Schedule
• An economic model that helps us see
consumer reaction to various prices of a
product.
– Prices are shown on the vertical axis
– Quantities on the horizontal
Determinants of Demand
A non-price factor that influences
the amount of demand for a good
or service
1.
2.
3.
4.
5.
Income
Consumer Expectations
Population
Demographics
Consumer Tastes and
Adverting
Income
Income= The more
money your have, the
more opportunity you
have to ‘upgrade’
your good or service
Example: The more
spent on tickets, the
better seat you get
Consumer Expectations
The future can affect our demand for
certain goods or services.
Example: Buy a new home with tax credits good for
the reminder of the year
Example: Waiting to buy a new car and just fix up the
old car because your worried on your job and future
car payment
Example: Buy the computer now before the price goes
up next week
Population
The more of a population in a
town/city, the more potential of
customers.
Example: Targeting farmers in southern
Minnesota
Example: Having a hotel chain in a large city
Example: Selling to consumers over the
internet
Demographics
The statistical characteristics of the
population , such as age, race, gender,
occupation, and income level.
Example: Targeting a specific group
(Farmer, Hispanics, women,
teenagers)
Consumer Tastes and
Advertising
If the producer has a product/service which people
like, they will buy it. If they dislike the product/services
they won’t buy it. (likes vs. dislikes) (fads in society)
Example: Bands and Singers (Liking a particular style
of music)
Example: The latest style in shoes or clothes
Advertising—Target your ad money to your customers
(newspapers, internet, magazines, television, bill
boards)
What is Elastic Demand?
The situation that exists when quantity
demanded changes greatly in response to a
change in price.
This includes:
• When a product is NOT a necessity
• When there are readily available substitutes
• When the product’s cost represents a large portion
of consumer’s income
Example of Elastic Demand
• Pizza –why?
– Not a necessity (you can survive
without it)
– It has readily available
substitutes (sub sandwiches or
tacos restaurants)
Who Cares about Elasticity?

Producers
–
want to know the price elasticity of demand before
they changed the price


an elastic good would not sell much if you raised the
price
An inelastic good would continue to sell
What is Inelastic Demand?
The situation that exists when quantity demanded
changes only slightly or not at all in response to a
change in price
This includes:
•When the product is a necessity
•When there are few or no readily available
substitutes for the product
•When the product’s cost represents a small portion
of the consumers’ income
Example of Inelastic Demand
• Salt or soap---why?
– It is a necessity
– There are few or no readily
available substitutes
– Not expenses—doesn’t take up
a large portion of a paycheck
What is Total Revenue?
This is a business’s
total income;
sometimes called
total receipts—refers
to the total income
that a business
receives from selling
it’s products
Example--Total Revenue
• Selling 60 Nebraska hats at $10 and 30
jerseys at $50 would be a total revenue of
$600 plus $1,500 equaling $2,100 for the
Cornhusker team superstore for a day