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CHAPTER 4
DEMAND
CHAPTER 4.1
Microeconomics
Economic theory that deals with behavior
and decision making by individuals and
companies
Demand
Combination of desire, ability, and
willingness to buy a product
Demand depends on two variables:
1. The price of a product
2. Quantity available at a given point
In general, when the price of a product goes down,
people are willing to buy, or demand, more of it.
 When the price goes up, people are willing to buy
less.
You create demand for a product when you wish to
buy it, and have the money to pay for it

Economists
Analyze demand by listing prices, and quantities in
a demand schedule
Demand schedule
Lists the various quantities demanded of a product at
all prices that might prevail
Demand Schedule
Price
$9
$6
$4
$3
$2
Quantity Demanded
0
1
2
3
4
DEMAND CURVE
Shows the quantity of a product demanded
at each price that might prevail in the market
When graphed it forms a demand curve with
downward slope
• The Law of Demand states that the quantity
demanded of a product varies inversely with its
price
• The Law of Demand is called a “law” because it has
proven true after repeated studies and tests, and it is
consistent with common sense and observation
MARKET DEMAND CURVE
Shows the quantities of a product demanded by
everyone who is interested in purchasing it at all
possible prices
Marginal utility
 Extra satisfaction or additional usefulness obtained by
acquiring multiple units of a product.
• Diminishing marginal utility
 As we use more and more of a product, the extra
satisfaction we get from using additional quantities
begins to decline
 People are not usually willing to pay as much for the
second, third, or fourth unit as they did for the first unit
4.2
Factors Affecting Demand
Many things affect the demand curve, but only a
change in price can cause a change in quantity
demanded
Why do price and QD move in
opposite directions?
Demand increases when the price
decreases because people have
enough money to buy more
Income effect
 Change in quantity demanded because a change in price
made the consumer feel richer or poorer
Substitution effect
 Consumers substitute an alternative less expensive
product for one that has more expensive
CHANGE IN DEMAND
Demand can change because of changes in various
factors:
1. Change in income
As incomes rise, consumers are able to buy more
products
A loss in income would cause them to buy less of a
product
2.
Consumer tastes
 Consumers often change their minds about products to
buy
 Advertising, fashion trends, seasons, peer pressure, etc.
3. Substitutes
 Products used in place of other products.
 Example: a rise in the price of butter will cause an
increase in the demand margarine
4.
Complements
 Other related goods
Change in Expectations
“Expectations” refers to the way people think about
the future
If future shortages of a product are predicted, this
might cause demand to increase
5.
This cartoon shows how expectations about the future
may affect consumer demand
Which consumer is allowing their expectations about
the future affect demand and how?
The hesitant shopper is
expecting the arrival of
the newer phone, so she
is not buying a phone
now, decreasing the
demand.
6.
Number of consumers
 Increase in consumers would shift the demand curve to
the right
 Decrease in consumers would shift the demand curve to
the left
 What would happen to the demand curve for toys if the
birthrate declined?
 The demand curve would shift to the left because there
would be a decline in demand for toys at each and every
price.
4.3
Elasticity of Demand
ELASTICITY
 An important cause-and-effect relationship in
economics
 Measure of responsiveness that tells how a
dependent variable (quantity), responds to a change
in an independent variable (price)
 Measures how sensitive consumers are to price
changes
 Price is almost always the independent variable
Demand elasticity
 Extent to which a change in price causes a change in quantity
demanded (QD)
Elastic
 When a change in price causes a relatively larger change in QD
 the need for a product is NOT urgent
 the doubling of price to increase revenue would result in a
dramatic decline in revenue
Inelastic demand
 When a change in prices causes a relatively smaller
change in QD
Unit elastic demand
 When a change in price
causes a proportional change
in QD
 the % change in QD roughly
equals the % change in price
Examples: Milk, table salt
To measure elasticity of demand, compare the
percentage change in quantity demanded to the
percentage change in price
THREE FACTORS DETERMINE A PRODUCT’S
DEMAND ELASTICITY
Can purchase be delayed?
(inelastic – QD is not sensitive to P
2. Is there adequate substitutes?
(many: elastic); or (few: inelastic)
3. The amount of income required to make
purchase. (Large: elastic) (Small:
inelastic)
1.
• When a price change
results in a relatively
larger change in total
expenditures, the
demand is said to be
elastic
• A change in price
moves in the opposite
direction from the
change in revenue
• When a price change
results in a relatively
smaller change in
total expenditures,
the demand
• Demand is usually
inelastic if
consumers cannot
postpone the
purchase of a
• When a price change
results in a proportional
change in total
expenditures
• There is no change in
revenue regardless of the
price change
This chart shows how changes
in price and expenditures
result in different types of
elasticity
Businesses often experiment
with different prices for a new
product to determine its
demand elasticity; this allows
the businesses to set a price
that maximizes total revenue
When acceptable substitutes are available for a
product, demand becomes more elastic
Demand for purchases that
require a large portion of
income is generally more
elastic than the demand
for purchases that require
smaller amount of income