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Chapter 4: Demand
The Law of Demand
KEY CONCEPTS
– Demand—the desire for an item and the ability to
pay for it
– Law of demand
when price of good or service goes up, quantity
demand goes down
when price of good or service goes down, quantity
demand goes up
Demand Schedules
KEY CONCEPTS
– Demand schedule—a table that summarizes
one consumer’s behavior
lists how much of an item an individual will buy at
each price
– Market demand schedule—a table that
summarizes all consumers’ behavior
lists how much of an item all consumers will buy at
each price
Demand Curves
KEY CONCEPTS
– Demand curve—a graph that shows amount
of an item a consumer will buy at each price
– Market demand curve—amount all
consumers will buy at each price
– Demand curves graphically show information
found on demand schedules
Reviewing Key Concepts
Explain the differences between the terms
in each of these pairs:
– demand and law of demand
– demand schedule and demand curve
– market demand schedule and market demand
curve
What Factors Affect Demand?
More About Demand Curves
KEY CONCEPTS
– Law of diminishing marginal utility
marginal benefit of each additional unit declines as
each unit is used
– Income effect
amount people buy changes as purchasing power of
their income changes
– Substitution effect
amount people buy changes as they buy substitute
products
Change in Quantity Demanded
KEY CONCEPTS
– Change in quantity demanded
change in amount consumers buy because of
change in price
each change shown by new point on demand
curve
does not shift the demand curve itself
Change in Demand
KEY CONCEPTS
– Change in demand is caused by a change in
the marketplace
prompts people to buy different amounts at every
price
also called shift in demand
– Six factors can cause change in demand
What is Elasticity of Demand?
Elasticity of Demand
KEY CONCEPTS
– Buying habits affected by type of product and
importance to consumer
– Elasticity of demand
measure of how responsive consumers are to price
changes
Elastic—quantity demanded changes greatly as price
changes
Inelastic—quantity demanded changes little as price
changes
What Determines Elasticity?
KEY CONCEPTS
– Three factors affect elasticity of demand
availability of substitutes
proportion of income spent on good or service
whether product is a necessity or luxury
Calculating Elasticity of Demand
KEY CONCEPTS
– Knowing elasticity of demand tells sellers
whether to cut prices
if demand is elastic, price cuts might increase
earnings
if demand is inelastic, price cuts will not increase
earnings
– formulas used to calculate elasticity
Is change in quantity demanded greater than
change in price?
Total Revenue Test
KEY CONCEPTS
– Total revenue—amount of money company
gets for selling its products
Formula: TOTAL REVENUE = P (price) x Q
(quantity sold)
– Total revenue test—shows total revenue from
item at various prices
if total revenue increases after price drops,
demand is elastic
if total revenue decreases after price drops,
demand is inelastic
Reviewing Key Concepts
Use each of these terms in a sentence
that gives an example of the term:
– elastic
– inelastic
– total revenue