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DEMAND
NATURE OF DEMAND
Ch. 3, Sec. 1
Bell Ringer
When
does the substitution
effect not apply to
demand?
Nature of Demand
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Demand : amount of a good or service that a
consumer is willing to buy at various possible
prices

Quantity Demanded : amount of a good or service
that a consumer is willing to buy at each particular
price

Law of Demand : In a free-enterprise system
PRICE_ is the key variable affecting demand.

Law of Demand studies the relationship between
PRICE _ and QUANTITY DEMANDED_.
Cont…

Cause / Effect
Price of computers increases = demand
______________
Price of computers decreases = demand
______________
 Three economic concepts help explain the
law of demand:
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Income effect
The substitution effect
and diminishing marginal utility
Cont…
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Purchasing Power : amount of __________ that people have
available to spend
Name the person in the room with the most purchasing
power!
Income Effect: any increase or decrease in a consumer's
purchasing power caused by a change in _________
Examples: ________,________, and ________
Substitution Effect : describes the tendency of consumer to
substitute a lower priced item for another
Examples:1)
2)
Demand Schedule : list of the quantity of goods that
consumers are willing to buy at a series of possible prices
Demand Curves : a graph that shows the relationship
between the price of a product and the quantity demanded
CFU - Vocabulary - Demand
Fill in the blank with the correct term.
1. In a free-enterprise system , _______ is the main
component affecting demand.
2. Demand schedules and curves illustrate the relationship
between ________ and _____________.
3. When a consumer buys a product at a specific price it
is called ____________.
4. A consumers _________ will effect his/her purchasing
power.
5. ___________ is an inverse or opposite relationship
DEMAND SCHEDULE
Price per Car
Stereo
$500
Quantity
Demanded
$500
$400
$1,000
$300
$1,500
$200
$2,500
$100
$5,000
Law of Demand

Law of Demand:
Income Effect
Substitution Effect
Diminishing Marginal Return
as more units of a product are
consumed , the satisfaction received
from consuming each additional unit
declines (utility)
*there is a limit to a product's utility to
a consumer = a limit to demand
Changes in Demand
Demand Shifts : markets DO Not stand still
Shifts = to the right = increases
= to the left = decreases
What causes these shifts in demand?
Determinants of Demand: non-price
factor that affects demand for a
product
Bell Ringer
How
can consumer tastes &
preferences influence
demand?
Changes in Demand, Ch.3, Sec.2

Objective – TLWBAT:
1. Explain what it means for a product/
demand to shift.
2. Identify & describe the factors that
can shift demand for a product.
3. Explain how substitute goods differ
from complementary goods.
Causes of Changes in Demand

1. Consumer Tastes and Preferences
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2. Market Size

3. Income

4. Prices Related to Goods

5. Consumer Expectations
Consumer tastes & preferences

What happens to the demand curve when
consumer preference grows for a product or
service?
Answer: Demand _____

What happens to the demand curve when
consumer preference fades for a product or
service:
Answer: Demand _____
Market Size

Market expansion leads to more consumers
than before which means a greater potential
demand.
 Market contraction leads to less consumers
creating a smaller potential demand.
 Reasons for expansion or contraction:
1. decisions by private businesses – Ex.
2. gov’t. policy decisions – Ex.
3. new technology – Ex.
Income
Income increases & people have more
money to spend. The result is a greater
demand for goods & services & a shift to
the right in demand curve.
 Income decreases leads to _________
in demand b/c consumers less willing to
_______ money & contribute to demand.

Prices of Related Goods

There are 2 types of related goods:
1. Substitute Goods – goods that can
replace the purchase of similar goods when
prices rise.
Ex: butter & margarine
 Complimentary Goods –goods that are
commonly uesed w/other goods.
Ex: price of gallon of paint increases
so paint brushes decrease in demand.
Consumer Expectations

Have you ever bought anything in
anticipation of having more money from a
new job? If so, you shifted demand by way
of expectation of future income.
Ex: You work at a restaurant & owner
announces that all employees will receive a
$.50 raise. You have been hoping to buy a
CD & decide to buy the CD in anticipation of
the raise.
Checking for Understanding
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In a market, a shift to the right means ____.
What causes shifts in demand?
What happens to demand curve when
consumer preference fades?
What are 3 reasons for expansion or
contraction of market size?
Income decreases lead to _______.
Name the 2 types of related goods? __ & __
Define Consumer Expectation & give an
example.
Linking Economics & Psychology
Checking for Understanding
 P. 61 Questions
1. What are some of the positive &
negative aspects of using psychological
research in developing advertising
campaigns?
2. In what ways can an
understanding of psychology help
consumers evaluate an advertisement?

Linking Cont…
Answers:
1.positive aspects — ad campaigns more
successful, & producers sell more as a result;
consumers feel better about product they buy;
ads more exciting & interesting; ads better
able to inform consumers about products they
want;
2.Negative aspects — consumers decide
to buy a product on emotional responses to
ads, not b/c they actually need product or it is
a good buy; ads may not provide much actual
product information.
Linking cont…
2. If consumers understand the
methods advertisers are using to try to
influence their buying behavior, they
will be better able to ignore the
psychology of advertising and focus on
making the best economic decision.
Bell Ringer
Is
the demand for portable
tape players elastic or
inelastic?
Elasticity of Demand
Ch.2, Sec. 3
TLWBAT:
1. Define demand elasticity.
2. Describe the difference between
elastic & inelastic demand.
3. Explain how demand elasticity is
measured.
Elasticity of Demand

Elasticity of Demand – is the degree to which
changes in a good’s price affect the quantity
demanded by consumers.

Elastic of Demand - exists when a small change
in price causes a major change in quantity
demanded.
1. the product is not a necessity
2. there are readily available substitutes
3. the product's cost represents a large
portion of the consumers income
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Good Elasticity can change if:
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the product is not a necessity
there are readily available substitutes
the product’s cost represents a large
portion of the consumers income.
Elasticity Examples:
Examples:
 Pizza - Is pizza a necessity?
Are they readily available
substitutes for pizza?
Does the cost of pizza
represent a large portion of
your income?
Inelastic Demand

Inelastic Demand: exists when a change in
price has little impact on quantity
demanded. A good has this when:
1. the product is a necessity
2. there are few readily available
substitutes
3. the product's cost represents a small
portion of your income
Inelasticity Cont…

List five examples of items that have
inelastic demand:
1.
2.
3.
4.
5.
Elasticity in Specific & General
Markets

Specific Market – small part of the product’s overall
“scene”
Ex: demand is elastic b/c if there is competition
among stores regarding differences in price, demand
will drop at some stores.

General Market – included all the background of the
product’s market
Ex: demand is inelastic if flour rises
b/c the quantity stays the same
b/c flour is a basic staple
Measuring Elasticity
Total-Revenue Test: total receipts /
income from selling its product.
 By monitoring any changes in a
business’s total revenue before & after
change in price of product, you can
determine elasticity for that product.
 Degree of elasticity can vary for different
price ranges.
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Total Revenue & Elastic Demand
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Drop in business’s total
revenue from a price
increase indicates
elastic demand for
product.
You can confirm
elasticity of demand by
looking at demand curve
in Figure 3.6 (p.67)
Price per
Ticket
Quantity
Demanded
Total
Revenue
$5.00
10,000
$50,000
$4.50
22,500
$101,250
$4.00
30,000
$120,000
Total Revenue & Inelastice Demand
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Turn to p.67 in textbook & look at Effect
of Demand Elasticity (Figure 3.6) & Total
Revenue Illustration. (A-B)
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Looking at Figure 3.6 on p.67, you can
find the point where total revenue is
maximized. In other words, what is price
movie theaters should charge to achieve
highest revenue? (price is $4.00)
Checking for Understanding
Read p. 69, Economics in the News &
answer 2 question on What do you
think?
 P. 71 – Interpreting the Chart questions
 P. 71 – Analyzing Primary Sources
questions.
 TEST TOMORROW ON CH.2 &
NOTEBOOK CHECK!!!
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