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Chapter 3
Demand
Ch. 3 Section 1- Nature of Demand
• Demand- the amount of a good or service a
consumer is willing and able to buy at various
possible prices during a given time period.
• Quantity Demanded- amount of a good or
service that a consumer is willing and able to
buy at each particular price during a given time
period.
• Law of demand
– Describes the relationship between price and
quantity demanded it is inverse
– principle that, all other factors being equal,
consumers will purchase or demand more of a good
at lower prices and less at higher prices.
• 3 economic concepts help
explain the law of demand:
1.Income effect- an increase or
decrease in consumer
purchasing power caused by a
change in price.
– Purchasing Power- the amount
of income that people have to
spend on goods and services.
2. Substitution Effectconsumer’s tendency to
substitute a lower price good for
a similar 1 that is priced higher.
3. Diminishing marginal utilitythe usefulness of each unit
consumed decreases with each
additional unit.
• Demand schedule- lists the
quantity of goods that
consumers are willing and
able to buy at many possible
prices.
• Demand curve- plots the
information in a demand
schedule that shows the
relationship between the
price of an item with the
quantity demanded.
• Create your own demand
schedule & curve. Reference
the one on page 55 for help.
Mexico Grumbles over Rise in
Tortilla Prices
1. What is the relationship between the demand
for ethanol and the price of tortillas?
2. Why do some officials blame the NAFTA
agreement?
3. Why is the price of tortillas so important in
Mexico?
4. Why are small producers concerned that
WalMart is keeping their prices artificially low?
Ch. 3 Section 2- Changes in Demand
• Determinants of
demand: Factors
other than price
that influence the
amount of
demand for a
good or service.
– Shifts the curve to
the right
(increase) or the
left (decrease).
1. Consumer tastes and preferencespopularity
2. Market Size- can increase due to
advertising- can shift due to gov’t.
controls (cutting off or opening up trade) ,
technology- can create new products and
markets
3. Consumer Expectations- consumers
expect a change in income so they
change their buying habits. Ex. pay raise,
tax refund
4. Income
5.Prices of related goods- changes in a
product’s price can effect the demand for
related goods
• Substitute goods- goods that can be
purchased instead of a similar good.
Ex. Butter and margarine.
• Complementary goods- these are
frequently used simultaneously. Ex. milk
and cereal
Complements or Substitutes
• What is the difference between
a complement and a
substitute?
Product 1
Product 2
1. Pepsi
Coke
2. Hamburger
Ketchup
3. Hamburger
Bean Burrito
4. Computer
Flash Drive
5. Pencil
Notebook Paper
6. DVDs
Video Tapes
7. Headphones
IPod
Substitute or
Complement
Product 1
Product 2
Substitute or
Complement
1. Pepsi
Coke
Substitute
2. Hamburger
Ketchup
Complement
3. Hamburger
Bean Burrito
Substitute
4. Computer
Flash Drive
Complement
5. Pencil
Notebook Paper
Complement
6. DVDs
Video Tapes
Substitute
7. Headphones
IPod
Complement
Fill in the answers to the following
questions with (increase/decrease) or
(complement/ substitutes.
Exp. The price of Big Macs increases
causing a decrease in the Big Mac
market. Therefore, the demand for Mc
Fries decreases because the two items
are complements.
1. The cost of Honda Accords decreases,
causing ________ in the Honda market.
Therefore, the demand for the Toyota
Camry (assume they have about the
same value) __________ because the
two items are______________.
2. The cost of automobile maintenance
increases, causing__________ in the
maintenance field. Therefore, the
demand for public transportation
_______because it is____________.
1. The cost of Honda Accords decreases,
causing increase in the Honda market.
Therefore, the demand for the Toyota
Camry (assume they have about the
same value) decreases because the two
items are _substitutes__.
2. The cost of automobile maintenance
increases, causing _decrease_ in the
maintenance field. Therefore, the
demand for public transportation
increases_ because it is _a substitute_.
3. The price of movie theater tickets
increases, causing ________ in the movie
ticket market. Therefore, the demand for
movie rentals_________ because the two
items are _____________.
4. The price of CD players decreases,
causing ____________ in the CD player
market. Therefore, the demand for CDs
__________ because they are
______________.
3. The price of movie theater tickets
increases, causing decrease in the movie
ticket market. Therefore, the demand for
movie rentals increases because the two
items are substitutes.
4. The price of CD players decreases,
causing __an increase_ in the CD player
market. Therefore, the demand for CDs
_increases__ because they are
__complements.
Which way would a demand curve shift in the following scenarios?
Write “left” or “right” and which determinant of demand caused the
shift.
1. Papa John’s Pizza is offering $1 pizzas for students
on Monday nights.
2. The government releases a report that Taco Bell’s
meat is actually dog food.
3. Susan’s job at Six Flags ends in late October.
4. John has taken a second job.
5. Abercrombie opened a new store dedicated to preteens.
6. The local Pepsi plant has an explosion and has to
close, what happens to the demand for Coke?
7. The price of jelly increases 200%, what happens to
the demand for peanut butter?
Chapter 3 Section 3 Elasticity of Demand
• Elasticity of Demand- extent to which a change in a
good’s price will affect the quantity consumers
demand.
• Draw 3 demand curves in your notes: one vertical, one
horizontal and one almost horizontal to a certain price
and then vertical
• Vertical- a change in price has little impact on quantity
demanded (Inelastic)
• Horizontal- small change in price results in a large
change in quantity demanded (Elastic)
• Mixture- a change in price results in a large change in
quantity demanded until the price reaches a certain
point and then the price has little effect on the quantity
demanded.
• What products fit each of these?
Elastic demand
• Changing a good’s price brings about a substantial,
opposite change in the quantity demanded.
Description of products:
A. product is not a necessity
B. there are easily available substitutes
C. the cost of the product is a large percentage of a
consumer’s income
Inelastic Demand
• Changing a good’s price
has only a tiny impact on
the quantity demanded.
Description of products:
A. product is a necessity
B. there are few or no readily
available substitutes
C. product only costs a small
portion of a consumers’
income
• What are some products that might have a
perfectly elastic or perfectly inelastic
demands?
• Total revenue- total income that a
business obtains from selling its products