Download 08EPP Chapter 04

Chapter Introduction
Section 1: What is Demand?
Section 2: Factors Affecting
Demand
Section 3: Elasticity of
Demand
Visual Summary
Think about the items you bought
during the past two months.
What influenced your purchases?
Did you need the items, or did
you buy them because you
wanted them? Make a list of the
items, and next to each one write
why you bought it. Then add for
each item whether you would
have bought more if the price had
been lower, or fewer had the
price been higher. Read Chapter
4 to learn how economists
interpret your actions.
Markets exist when buyers
and sellers interact, and
market prices are set by the
interaction of demand and
supply.
Section Preview
In this section, you will learn that you express
demand for a product when you are willing and
able to purchase it.
Content Vocabulary
• demand
• demand curve
• microeconomics
• Law of Demand
• market economy
• market demand curve
• demand schedule
Academic Vocabulary
• marginal utility
• diminishing marginal utility
What is Demand?
• Demand for a product is more than having
the desire to own an item. Demand includes
the ability and willingness to pay for it.
• Microeconomics is the part of economic
theory that deals with behavior and decision
making by individuals and firms.
An Introduction to Demand
Demand is a concept
specifying the different
quantities of an item that will
be bought at different prices.
An Introduction to Demand (cont.)
• Demand is central to a market economy.
• Demand involves two variables:
– Price
– Quantity of a specific product at a given
point in time
The Demand for Compact Digital Discs
An Introduction to Demand (cont.)
• A demand schedule shows the various
quantities demanded of a good at all
prices that might prevail in the market at a
given time.
• A demand schedule shown graphically
is a demand curve.
The Demand for Compact Digital Discs
The Law of Demand
There is an inverse
relationship between the price
of an item and the quantity
demanded.
The Law of Demand (cont.)
• Higher prices are associated with smaller
amounts demanded on most goods or
services we buy. This is the Law of
Demand.
– Quantity demanded varies inversely
with its price.
• The market demand curve shows quantities
demanded by everyone in the market who is
interested in the
product/service. Individual and Market
Demand Curves
Demand and Marginal Utility
As we buy more of an item,
we get less satisfaction from
each additional purchase.
Demand and Marginal Utility (cont.)
• Utility is the amount of product satisfaction
or usefulness one receives from its use.
• Marginal utility explains much about
demand.
• As we use more of a product, we
encounter diminishing marginal utility.
Section Preview
In this section, you will learn about the factors that
cause changes in demand.
Content Vocabulary
• change in quantity
demanded
• income effect
• substitution effect
• change in demand
• substitutes
• complements
Academic Vocabulary
• principle
• illustrated
Change in the Quantity Demanded
Only a change in price can
cause a change in quantity
demanded.
Change in the Quantity Demanded (cont.)
• When only the price changes and all else
remains constant, there is a change in the
quantity demanded.
– Income effect
– Substitution effect
• A change in quantity demanded is a
movement along the original
demand curve.
Change in the Quantity Demanded
Change in Demand
Several factors can cause the
demand curve to shift.
Change in Demand (cont.)
• Factors other than price can cause a
change in demand.
• A change in demand results in an entirely
new demand curve.
Change in Demand
Change in Demand (cont.)
• Factors for demand changes
– Consumer income
– Consumer tastes
– Price of related goods
• Substitutes
• Complements
Change in Demand
Change in Demand (cont.)
– Expectations
– Number of consumers
Change in Demand
Section Preview
In this section you will learn about the factors that
influence the size of a change in quantity
demanded.
Content Vocabulary
• elasticity
• inelastic
• demand elasticity
• unit elastic
• elastic
Academic Vocabulary
• technical
• adequate
Elasticity of Demand
• An important cause-and-effect relationship
in economics is elasticity.
Profiles in Economics:
Oprah Winfrey
Demand Elasticity
When the price of an item
changes, the change in
quantity demanded can vary a
little or a lot.
Demand Elasticity (cont.)
• Consumers react to changes in price by
changing the quantity demanded. The size
of the reaction is demand elasticity.
• Demand can be
– Elastic—fresh produce
– Inelastic—table salt
– Unit elastic
Demand Elasticity
and the Total Expenditures Test
The Total Expenditures Test
The total expenditures test is
used to estimate the demand
elasticity of a product.
The Total Expenditures Test (cont.)
• Total expenditures—the price of a product
multiplied by the quantity demanded for
any point along the demand curve.
• Can test for elasticity by observing the
change in total expenditures when the
price changes. Three results occur:
– Elastic demand—an “inverse”
relationship between price and
expenditures
The Total Expenditures Test (cont.)
– Inelastic demand—movement occurs
in the same direction
– Unit elastic—no change in expenditure
• Elasticity and revenues
– Raising the price of an inelastic product
may help increase revenue.
– Raising the price of an elastic product
will likely decrease revenue.
Determinants of Demand Elasticity
The answers to three
questions help determine a
product’s demand elasticity.
Determinants of Demand Elasticity (cont.)
• Must answer three questions to determine
if a demand for a good is elastic or
inelastic.
– Can the purchase be delayed?
– Are adequate substitutes available?
– Does the purchase use a large portion of
income?
Determinants of Demand Elasticity
Law of Demand The Law of Demand states that
when the price goes up, quantity demanded goes
down. When the price goes down, quantity
demanded goes up.
Change in Demand When a change in demand
occurs, people want to buy different amounts of a
product at the same price. A change in demand can
happen for several reasons.
Demand and Elasticity Changes in price and total
expenditures help determine the demand elasticity
of a product.
Oprah Winfrey (1954– )
• first woman in history to
produce and own her own
talk show
• first African American
woman—and third woman in
history—​to own a major
television and film studio
demand
combination of desire, ability, and
willingness to buy a product
microeconomics
part of economics that studies small
units, such as individuals and firms
market economy
economic system in which people and
firms make all economic decisions
demand schedule
a table that lists how much of a
product consumers will buy at all
possible prices
demand curve
a curve that shows the quantities
demanded at all possible prices
Law of Demand
rule stating that consumers will buy
more of a product at lower prices and
less at higher prices
market demand curve
a curve that shows how much of a
product all consumers will buy at all
possible prices
marginal utility
additional satisfaction or usefulness a
consumer gets from having one more
unit of the same product
diminishing marginal utility
decrease in satisfaction or usefulness
from having one more unit of the
same product
prevail
to predominate
inversely
in the opposite way
change in quantity demanded
movement along the demand curve
showing that the amount someone is
willing to purchase changes when the
price changes
income effect
that part of a change in quantity
demanded due to a change in the
buyer’s real income when a price
changes
substitution effect
that part of a change in quantity
demanded due to a price change that
makes other products more or less
costly
change in demand
shift of the demand curve when
people by different amounts at
every price
substitutes
competing products that can be used
in place of one another
complements
products that increase the use of
other products
principle
a fundamental law or idea
illustrated
shown with an image
elasticity
a measure of responsiveness that
shows how one variable responds to
a change in another variable
demand elasticity
a measure that shows how a change
in quantity demanded responds to a
change in price
elastic
type of elasticity where a change in
price causes a relatively larger
change in quantity demanded
inelastic
type of elasticity where a change in
price causes a relatively smaller
change in quantity demanded
unit elastic
type of elasticity where a change in
price causes a proportional change in
quantity demanded
technical
related to a particular subject such as
art, science, or trade
adequate
just enough to satisfy a requirement
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