Download ECON_CH04_Demand

Demand
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What is Demand?
The Law of Demand
Demand: the desire for an item and the ability to pay for it
Law of demand: when price of good or service goes up, quantity demand
goes down and vice versa
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The Law of Demand
Price & Demand
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Law of demand explains consumer behavior as well as economic
concept
Cheryl decides to spend money on DVDs
– at $15 each, Cheryl demands 3 DVDs
– at $5 each, she demands 7 DVDs
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Demand Schedules
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Demand schedule—a table lists how much of an item an individual
will buy at each price
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Market demand schedule—a table lists how much of an item all
consumers will buy at each price
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Demand Curves
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Demand curve—a graph that shows amount of an item a consumer
will buy at each price
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Market demand curve—amount all consumers will buy at each price
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What is Elasticity of Demand?
Elasticity of Demand
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Elasticity of demand measures how responsive consumers are to
price changes
Elastic—quantity demanded changes greatly as price changes
Inelastic—quantity demanded changes little as price changes
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What Determines Elasticity?
Substitute Goods or Services
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If no substitute for a product, demand tends to be inelastic ex.
gasoline
If there are substitutes for a product, demand tends to be elastic ex.
shoes
Necessity or Luxury
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Necessity—something needed for life, demand is inelastic ex.
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prescription medications
Luxury—something desired but not essential, demand for luxuries
tends to be elastic ex. BMW vs. Ford
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Vera Wang: Designer Responding to Demand
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Sophisticated wedding gowns not available for career women
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Wang created line of wedding gowns to meet demand
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Style became popular; other designers imitated
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Wang created more demand for her style by designing other products
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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demand and law of demand
demand schedule and demand curve
market demand schedule and market demand curve
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What Factors Affect Demand?
• Law of diminishing marginal utility: additional benefit of each additional unit
declines as each unit is used
• Income effect: amount people buy changes as purchasing power of their
income changes
• Substitution effect: amount people buy changes as they buy substitute
products
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Change in Quantity Demanded
– change in amount consumers buy because of change in price
– does not shift the demand curve itself
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Change in Demand
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Change in demand: caused by a change in the marketplace. It
prompts people to buy different amounts at every price. Also causes
shift in demand curve
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When we shift the demand curve, we assume
– ceteris paribus: everything else is held constant
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Change in Income Causes
Shift in Demand Curve
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As incomes of most consumers in a market change, so does total
demand
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normal goods—demanded more when consumers’ incomes rise
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inferior goods—demanded less when consumers’ incomes rise
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Change in Population/Market Size
Causes a Change in Demand
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Demand for most goods changes as market size changes
– rise in population leads to increased demand
– decrease in population leads to decreased demand
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Consumer Tastes/Advertising Causes a
Change in Demand
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Consumer tastes change; products gain and lose popularity
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Consumers demand a greater amount of popular items at every price
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Sellers advertise to create demand for products
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Change in Consumer Expectations Cause a
Change in Demand
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Expectations about future price of items affect individual behavior
– expected rise or fall in price can decide whether to buy now or wait
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Expectations of all consumers in a market affect demand
– Ex. because cars go on sale at end of summer, demand goes up
then
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Change in Price of Related Goods Causes a
Change in Demand
Substitutes
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products used in place of each other
– if price of substitute drops, people buy it instead of original item
– if price of original item rises, people will buy substitute
Complements
•goods that are used together
-a rise in demand for one increases the demand for the other
-If price of one product changes, demand for both changes in same
way.
-If price of one rises, demand for both will drop
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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change in quantity demanded and change in demand
income effect and substitution effect
normal goods and inferior goods
substitutes and complements
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Total Revenue Test
KEY CONCEPTS
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Total revenue—amount of money company gets for selling its
products
– Formula: TOTAL REVENUE = P (price) x Q (quantity sold)
Total revenue test—shows total revenue from item at various prices
– if total revenue increases after price drops, demand is elastic
– if total revenue decreases after price drops, demand is inelastic
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Reviewing Key Concepts
Use each of these terms in a sentence that gives an
example of the term:
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elastic
inelastic
total revenue
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Case Study: Fueling Automobile Demand
Background
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Demand for automobiles and all services connected with them is high
Car dealers want to sustain and increase demand for their product
What’s the Issue
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How does demand affect your selection of a vehicle?
Thinking Economically
1. How would the demand for automobiles be affected by information
presented in each of these documents? Support your answer with
examples from the documents.
2. Identify and discuss the factors that affect elasticity of demand
illustrated in these documents.
3. Explain how Documents B and C illustrate a cause and effect
relationship in the demand for SUVs. Use evidence from these
documents to support your answer.
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