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Chapter 4
Demand
Understanding Demand,
4.1
I. The interaction of supply and demand
determines the price and the quantity
produced of most goods
II. The Law of Demand
A. When a consumer is able and willing to
buy a good or service, he or she creates
demand
1. A basic principle of the law of
demand is when a good’s is
priced lower, people will buy more
of it.
III. The Substitution Effect
IV. The income effect
Week 1- Pizza is $10.
You buy 2 per week
Week 2- Pizza is $15.
You buy 1 per week
V. A demand schedule
A. Movie rentals were $2.95, Sara rented
ten movies a month. The price of a rental
increased by fifty cents and Sara decided
to rent two fewer movies a month. When
the price increased by one more dollar,
Sarah decided to cut the number of
movies she rented in half, and she now
rents 4 movies a month
Demand Schedule
B. Jasmine is willing to buy 40 pencils at
25 cents apiece. She will buy 80 pencils
at 15 cents apiece. When the price is ten
cents apiece, she is willing to buy 100
pencils.
C. Market Demand
Schedule
1. The system in the United States
economy based on the market
2. A market demand schedule shows the
quantities of products demanded at each
price by all consumers in a market
VI. Demand graph
 Ashley will buy 4
pieces of, if the price
is $1.00 per slice
 The price of a slice of
pizza has just
increased by $1 from
an earlier, low price,
but Ashley’s quantity
demand is unchanged
 Ashley’s elasticity of
demand as the price of
a slice of pizza
decreases from $2.00
to $1.00 is 1.0
 A slice of pizza costs
$4.00. Based on
Ashley’s demand curve
is zero of her quantity
demanded of pizza
Shifts in the Demand
Curve, 4.2
I. Ceteris paribus, or “all other things held
constant,” is an assumption that it is
accurate only at one price level in a
demand schedule
II. Changes in demand
I. Changes in demand
A. The price of movie tickets in a town
has risen from $7 to $9. The most
likely effect of the change in price is
the demand curve for movie tickets will
move left.
B. A shift in the demand curve means
a change in demand at every price.
III. What causes the shift
A. Income
1. Alex receives a raise at work and
continues to work the same number of hours
each week. His demand for $3 t-shirts, which
he considers an inferior good, will decrease
2. The price of a popular computer game
magazine rises from $2.95 to $3.95 it could
cause a sports magazine to shift to the right on
a demand curve
Inferior Goods
3. When prices rise, income goes down
4. Inferior goods are goods for which the
demand falls when income rises
C. Population
1. The existence of the baby boom generation
change demand in the United States, because
demand was raised for different goods with
each age the baby boomers reached.
2. A person moves from a desert community to a
rainy city by the ocean and this could
permanently shift a individual’s demand curve
for umbrellas to the right
D. Consumers tastes and
advertising
IV. Price related goods
 Complements
vs.
Substitutes
A new restaurant
has opened.
Ashley’s demand
for pizza has
decreased and
her demand curve
has shifted. The
combination of
price and quantity
demanded have
made her new
demand curve
change $2.00 for
three slices
Elasticity of Demand, 4.3
I. When the demand for a product is
inelastic the price increase does not
have a significant impact on buying
habits.
II. Values of elasticity
A. Unitary elastic demand means the
percentage change in quantity demanded
is exactly equal to the percentage
change in price.
1. Inelastic describes demand with an
elasticity of less than 1
B. Consumer expectations
1. Future price is related if the price is
expected to rise, current demand will
rise.
2. Demand for a good related to its future
price if the price is expected to drop,
current demand will fall.
Elasticity
2. Will, a sprinter on the track
team, has inelastic demand for
sports drinks. The local store has
raised the price of a sports drink
from $1.00 to $1.50. Will’s
response to the price change is
that he bought 10 bottles a month at
$1.00 and 8 bottles a month at $1.50.
Elasticity
3. Pencils would likely be bought in the
same quantity even if it doubled in price
4. Demand for movie rentals is highly
elastic. A video store that raises the price
of a rental will gain revenue.
III. Factors affecting
elasticity
A. Availability of substitutes
B. Relative importance
C. Necessities versus luxuries
1. Luxury goods might not be
bought when prices rise
D. Changes over time
Total Revenue
A. A company’s total revenue is the amount
a company receives for selling its goods
Elasticity of Demand
B. Elasticity of demand determines how a
change in prices will affect total revenue
for a company
High Elasticity
C. Demand for movie rentals is highly
elastic. A video store that raises the price
of a rental will possibly gain or lose
revenue