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What Is Demand?
Ch. 4
Demand
Demand- The willingness to buy a good or
service and the ability to pay for it.
 We have many wants, big house, car,
expensive clothes, but we can’t always
afford them.
 When we can’t afford them we have no
actual demand
 Actual Demand- having the desire and
ability to pay for a good or service

Price Always Plays A Role In
Demand
Law of Demand- When
prices go down,
consumer demand
usually rises. When
prices go up demand
usually goes down.
 Ex. PS3 costs $400.00
and their sales are down
compared to XBOX 360
which costs $299.00.
Sony is trying to
compete with Microsoft
by cutting prices


How does the law
of demand apply
to the game
console wars
between Sony,
Microsoft, and
Nintendo?
Displaying The Law of Demand
Demand Schedule- Shows how much of a
good or service an individual/consumer is
willing and able to purchase at each price
in a market. Used by individual
 Market Demand Schedule- Lists how much
of an item all consumers are wiling to
purchase at each price. Used by
businesses to set prices
 Demand schedules show individuals and
Market schedules show groups

Why do markets behave the same
way as individuals?

Ans- Because markets are made up of
individual consumers.
Refer to Text pg 102-103
Demand Curve- graphically shows data
from a demand schedule
 Market Demand Curve- graphically shows
data from Market Demand Schedule.

Sect. 2 What Factors Affect
Demand?

What influences you when you decide to
buy a good or service?
Why do you think the demand schedule
curve slopes downwards?
 What influences you when purchasing
goods and services?

Diminishing Marginal Utility
States the marginal benefit of using one
more unit of a product each time drops as
we use more.
 Refresher, Utility is the benefit we get
from using a good or service.

Example

You are hungry and decide
to go to Arby’s. You would
normally buy one meal to
satisfy your hunger. Each
additional meal you buy
will lead to less personal
benefit and a sick stomach.
Example Continued

Because you receive less satisfaction from
purchasing more than one meal the
consumer expects the price to drop as
well. Hence, the 5 for $5 Dollar Deal at
Arby’s
This creates the
downward
slope on the
demand curve
which we call
diminishing
marginal utility
 Refer to chart
on page 107

Two patterns cause consumers to
buy less at higher prices
Income Effect- change in the amount a
person will buy because the purchasing
power of their income changes
 Ex. You want to buy a video game. One is
$30 and the other game costs $50.
Buying the $30 game makes you feel
twenty bucks richer. If the overall price of
all games would rise to $50, you would
buy less games.

Substitution Effect- a change in the
amount that consumers will buy because
they buy the substitute product instead.
 Ex. Post Raisin Bran and Great Value
Raisin Bran.

Example
You go to the mall to buy an $80 pair of
shoes. You find a pair of shoes on sale for
$55 dollars.
 You substitute similar good for a cheaper
version
 Give a real world of example of how the
substitution effect causes consumers to
buy less at higher prices

Change In Quantity Demanded
This is where the amount demanded by
the consumer either increases or
decreases with price
 Refer to chart on page 108
 How would a demand curve on a demand
schedule and market schedule differ?
 Ans. Market takes into consideration larger
quantities due to looking at the whole
market

6 Factors That Change Demand
Change in demand occurs when
something prompts consumers to buy
different amounts at every price
 Factor 1- Income- when a person’s income
goes up or down the amount of purchases
will go up or down
 Make less $ demand less

Most times the more you make the
demand goes up. Goods that fall into this
category are normal goods
 Normal Goods- goods consumers demand
more when income rises
 Some goods the demand decreases when
income rises
 Inferior Goods- goods you want less of
when income rises

Example of Inferior Goods

Before pay raise
you rented an
apartment. With
your new job and
a higher salary
you decide to buy
a home.
Factor 2 Market Size
Deals with the number of
consumers within a market
 Ex. A college town- during
school months the market
for restaurants and fast food
increases. During the
summer months demand
changes due to students
going home for the summer.





Pop. Shifts or migration can
effect market size and
demand
Ex. Beaver Counties
population in 1970 was
208,418 and in 2006 was
177,736
With the collapse of the steel
industry came a drastic drop
in pop. This has led to a
smaller market place in the
county
Decrease in pop.= less
demand for goods and
services
Factor 3 Consumer Tastes
If a good or service is popular, people buy
it at any price. Once it loses popularity
price goes down.
 What could influence a rise in consumer
popularity?
 Advertising pays a key role in this factor.
Advertisers are looking to create demand
for a product

Factor 4 Consumer Expectations
Do you think the best price to
buy a good or service is now
or in the future? If its in the
future, you may wait to buy
the product. This causes a
rise in demand at a later date.
 Ex. I-Phone- A couple of years
from now the demand will
increase and prices will drop

Example

Cars are
usually
cheaper in
the summer
because
dealerships
are trying to
make room
on the lot for
the newer
models that
arrive in the
fall.
Factor 5 Substitutes
These are goods and services that can be
used in place of each other. They are
interchangeable.
 Ex. Price of gas is over $3 a gallon. You
decide to take public transportation
instead of driving. Demand for public
transportation goes up and personal
consumption of gas goes down




You are substituting
public transit for your
own car
Demand for the
substitute increases=
drops in demand for
the original
Heating Oil price
increases, which may
lead to people
substituting a wood
burner for a oil
furnace
Factor 6 Complements
When the use of one
product increases, an
accessory or
accompanying product of
the original increases
 Ex. DVD Players and
DVDS
 Ex. HD TVs and HD cable
service

Section 3 What is Elasticity of
Demand?
Price and Demand go hand and hand
 Price, consumer buying habit, and the
importance of the good or service play a
key role in demand.
 Price increase does not always change
demand
 Consumers respond to price change and
we measure this with elasticity of demand

Elasticity of Demand
It measures how
responsive
consumers are to
price change. How
flexible will their
wallets and buying
habits be?
 Ex. Elastic Band
 Demand can be
elastic or inelastic

Elastic Demand
Demand is elastic when price change of a
good or service drives demand way up or
way down
 Ex. If the price of a Dell Computer drops
by 10% and demand increases by 20%,
this means this good is elastic.
 When price rises 10% people decide to
buy a substitute product. An HP computer
 Products that have lots of substitutes are
usually elastic

Inelastic Demand
If quantity demanded changes little as
price goes up or down.
 Price has little impact on inelastic
products.
 Usually have few if any substitute
products
 Ex. Price of Milk

Overtime Elasticity of A Product
Can Change
The more substitutes
for the original the are
made overtime, then
the more elastic a
product may become.
 This can change price
and demand.
 Ex. Hybrid Cars- Right
now there are not many
options. In the future,
there will be more
substitute versions.

Refer to charts
showing elastic
and inelastic
demand
 Elastic curves
bow
 Inelastic
curves show
no change

Unit Elastic- when percentage change in
price and demand are the same
 Ex. Price rises 5% and quantity demand
falls 5%
 Unit Elastic is the middle ground between
elastic and inelastic

3 Factors That Affect Elasticity of
Demand
Factor 1- Substitute Goods or Services
 The more options or substitutes you have
for the consumer, the more elastic the
good
 The fewer substitutes, the more inelastic a
good or service becomes

Factor 2
Proportion of Income- the percentage of
our income you spend on goods or
services affects elasticity.
 Ex. You spend 10% of your income on
video games. Price of games rises, you
buy less games. This leads to more
elastic demand. You will look for other
options or substitutes for that product

Example
You spend a smaller percentage of income
on a Sunday paper. Price of the paper
rises, but you still buy that paper.
 There are few subs for that paper and it is
a small percentage of your income spent.
 This leads to a more inelastic demand.
 Income Rises=Demand Up Income
lowers=demand down

Factor 3 Necessities VS Luxuries
Necessities are inelastic. You need them
and price rise does not matter. Food,
water and shelter
 You still have to buy them, but you may
buy a little less.
 Your change in demand will still be smaller
than the price hike, so it remains inelastic

Luxuries you don’t need.
 There are many substitutes for luxury
items, which creates an elastic demand for
those goods

Calculating Elasticity of Demand
Businesses calculate Elasticity of Demand
to set prices for goods and services
 Elastic Prices- businesses may cut prices
to make more profit and create more
demand. Ex. Faygo Pop vs Pepsi
 Inelastic Prices- price cuts won’t help, you
don’t have to worry about substitute
goods or services


To determine Elasticity of Demand
economists look to see if percentage in
quantity demanded by consumers is
greater than the percentage change in
price
Formula- Elasticity of Demand
STEP 1 Original Quantity- New Quantity
Original Price
X 100=
= Percentage Change in Demand
STEP 2 Original Price- New Price
Percentage Change in Price
= Percentage Change in Price
X 100=

STEP3 %Change in Quantity
% Change in Price
=
Elasticity
If the final number is greater than 1, the
demand is elastic. Less than 1, it is
inelastic.
Economists calculate Total Revenue
(money made selling a good or service) to
measure elasticity
 Price X Quantity Sold = Total Revenue
 You can look at the results of revenue by
plugging in different prices X quantity
sold.
 This is known as the Total Revenue Test
