Download Demand Notes - Sunnyslope High School

Demand
Section 1: Understanding Demand
What Is Demand?
 Demand is the amount of goods and services that consumers are willing and
able to buy at varying prices. The desire to own something and the ability to
pay for it.
What Is the Law of Demand?
 The Law of Demand states that consumers buy more of a good when its price
decreases and less when its price increases. When the price of the good
increases, consumers will buy less of it.
 The price of a good will strongly influence your decision to buy.
•The law of demand is the result of two separate behavior patterns that
overlap, the substitution effect and the income effect.
•These two effects describe different ways that a consumer can change
his or her spending patterns for other goods.
Law of Demand in Action
Prices (P)
Demand (QD)
Prices (P)
Demand (QD)
1. Shows a cause and effect relationship:
A. Cause = Price B. Effect = Quantity Demanded
P = Price
QD = Quantity Demanded
= increase
= decrease
= causes
2. Demand is illustrated by a demand curve
3. Quantity Demanded is: the amount of goods and services that will be bought at
a specific time and at a specific price
The Demand Curve
 A demand curve is a graphical representation of a demand schedule.
 When reading a demand curve, assume all outside factors, such as income, are held constant.
The Demand Schedule
 A demand schedule is a table that lists the quantity of a good a person will buy
at each different price.
o In order to have demand, you must be willing and able to buy it at the specified
price. This means that you want the good and you’re able to buy it. If you cannot
afford a new laptop, then you do not demand one.
 A market demand schedule is a table that lists the quantity of a good all
consumers in a market will buy at each different price.
The Substitution Effect and Income Effect
The Substitution Effect
 The substitution effect occurs when consumers react to an increase in a good’s
price by consuming less of that good and more of other goods.
o EXAMPLE = When the price of pizza rises, pizza becomes more expensive
compared to other foods such as tacos, salad, subs or burgers. So as the price of a
slice of pizza increases, consumers have an incentive to buy one of those
alternatives as a substitute for pizza. This will cause a drop in the demand for pizza.
o This change in spending (going from pizza to a taco, sub..etc,) is known
as the substitution effect
The Income Effect
 The income effect happens when a person changes his or her consumption of
goods and services as a result of a change in real income, which is the amount
of money they make.
o EXAMPLE= Rising prices make us feel poorer. When the price of clothing, food,
gasoline, movie and concert/sporting event tickets increase, your limited budget just
won’t buy as much as it used to. It feels as if you have less money. You can no
longer afford to buy the same combination of goods, and you must cut back your
purchases of some goods. If at lunch, you buy fewer slices of pizza because of an
increase in price, that’s the income effect.
SECTION 1 QUESTIONS
1.
2.
3.
4.
What is the law of demand?
How do the substitution effect and income effect influence decisions?
What is a demand schedule?
What is a demand curve?
Section 2: Shifts of the Demand Curve
Shifts in Demand
 Ceteris paribus is a Latin phrase economists use meaning “all other things held
constant” and ONLY the price changed.
 A demand curve is accurate only as long as the ceteris paribus assumption is
true. The demand schedule from above ONLY took the change in price into
account. It did not take a possible news report, or one of a thousand other
possible factors that change from day to day.
 When the ceteris paribus assumption is dropped, movement no longer occurs
along the demand curve. Rather, the entire demand curve shifts.
What Causes a Shift in Demand?
 Several factors can lead to a change in demand:
1. Income
o Changes in consumers incomes affect demand.
 A normal good is a good that consumers demand more of when their
incomes increase. An increase of $75 dollars a week will cause one to
buy more of a normal good at all levels. This would cause an increase in
demand at all price levels and shift the demand curve to the right. If a
persons income was to decrease, demand would decrease and cause
the demand curve to shift to the left.
 An inferior good is a good that consumers demand less of when their
income increases. Inferior goods are goods that you would buy in smaller
quantities, or not at all, if your income was to rise and you could afford
something better.
Examples= generic foods, clothes at Good Will, Used Vehicle
2. Consumer Expectations
o Whether or not we expect a good to increase or decrease in price in the future
greatly affects our demand for that good today.
 Example= If you were in the market to buy a new computer, and while
looking at new computers the employee informs you that next week, the
prices are expected to rise, you’ll be more likely to purchase the computer
before the price increases, or if the price of the computer is expected to
decrease in a week, it’s more likely that you’ll wait for the price to drop
then buy it.
 Example= Filling up your car with gasoline before the price is
expected to increase significantly by the next day.
3. Population
o Changes in the size of the population also affects the demand for most products.
 Example= A sharp increase in population will cause a demand for
housing, food and other related goods and services. (Southwestern US)
 Example= the baby boomer generation after WWII (1945). This led to a
higher demand in baby clothes, food, education(elementary, high school
and college)
4. Consumer Tastes and Advertising
o Advertising and social trends play an important role in many trends and therefore
influences demand. Fads come and go.
o Changes in tastes and preferences cannot be explained by changes in income or
population or worries about future price increase. Advertising is considered a
factor that shifts demand curves because it plays an important role in many trends.
Prices of Related Goods
 The demand curve for one good can be affected by a change in the demand for
another good.
o There are two types of goods that interact this way:
 1. Complements are two goods that are bought and used together.
Examples: skis and ski boots, peanut butter and jelly, tennis rackets and
tennis balls, bowling balls and bowling shoes, shampoo and conditioner,
DVD and a DVD player, computer and printer
 However an increase in one good could cause consumers to buy less of the
other good. If the price of skis sky rocketed, then people would not only buy
less skis, they would also buy less ski boots. If peanut butter become
increasingly expensive, people would demand less peanut butter and also
jelly.
 2. Substitutes are goods used in place of one another.
Examples: skis and snowboards. If skis became too expensive people
might substitute snow boards instead. If the price of red meat increased,
consumers might substitute chicken or pork, or seafood instead of red meat.
If the price of Kraft Mac and Cheese increased, consumers might substitute
a generic brand instead.
SECTION 2 QUESTIONS
5. What factors can cause shifts in the demand curve? Give an example of each.
6. How does the change in the price of one good affect the demand for a related good?
Section 3: Elasticity of Demand
What Is Elasticity of Demand?

Elasticity of demand is a measure of how consumers react to a change in price.
o Elasticity of demand dictates how drastically buyers will cut back or
increase their demand for a good when the price rises or falls.

Demand for a good that consumers will continue to buy despite a price increase
is inelastic or relatively unresponsive to price change.
o Examples= gasoline, life threatening medicines, certain foods,
water/utilities, housing, transportation, jewelry, clothing, entertainment

Demand for a good that is very sensitive to changes in price is elastic. A
consumer with highly elastic demand for a good is very responsive to price
changes.
o Examples= gasoline, life threatening medicines, certain foods,
water/utilities, housing, transportation, jewelry, clothing, entertainment
Calculating Elasticity
Factors Affecting Elasticity
 Several different factors can affect the elasticity of demand for a certain good.
1. Availability of Substitutes
 If there are few substitutes for a good, then demand will not likely decrease as
price increases. The opposite is also usually true.
o Example= If there is a variety of substitutes available, then a good can become
elastic. The demand for apple juice is probably elastic because people can
choose from dozens of good substitutes if the price of their preferred brand rises.
2. Relative Importance
 Another factor determining elasticity of demand is how much of your budget you
spend on the good. If you spend a large share of your income on a good, a price
increase will force you to make some tough choices. Unless you want to cut back
drastically on the other goods in your budget, you must reduce consumption of that
good by a significant amount to keep your budget under control.
3. Necessities versus Luxuries
 Whether a person considers a good to be a necessity or a luxury has a great impact on
the good’s elasticity of demand for that person. A necessity is a good that people will
always buy, even when the price increases. (Milk) One might view steak or lobster as
a luxury and when either one increases by 30%, families may reduce their demand for
such goods.
4. Change over Time
 When a price changes, consumers often need time to change their shopping habits.
Consumers do not always react quickly to a price increase because it takes time to find
substitutes

Because they cannot respond quickly to price changes, their demand is inelastic in the
short term. Demand sometimes becomes more elastic over time because people can
eventually find substitutes.
SECTION 3 QUESTIONS
7. What is elasticity of demand?
8. What is inelastic and elastic demand? Give an example of each.
9. What factors affect elasticity? Give an example of each.
Chapter 4 Vocab
Demand
Law of Demand
Substitution Effect
Income Effect
Substitutes
Ceteris Paribus
Normal Good
Inferior Good
Complements
Market Demand Schedule
Elastic
Inelastic
Demand Curve
Demand Schedule
Elasticity of Demand