Download Chapter 4 Demand

Section 1- Understanding Demand
Law of Demand- Consumers
buy more of a good when its
price decreases and less when
its price increases
 Substitution Effect- When
consumers react to an increase in a
good’s price by consuming less of
that good and more of other goods
Income Effect- the change in
consumption resulting from a
change in real income
 If you get a raise you buy more, if
you get fired you buy less
Demand Schedule
Price
Quantity
 .50
5
 1.00
4
 1.50
3
 2.00
2
 2.50
1
 3.00
0
Demand Curve- graphic representation of
a demand schedule
Demand for Pizza
3.5
3
2.5
2
1.5
1
0.5
0
o slices
1 slice
2 slices
3 slices
4 slices
5 slices
Note: Increase is always to the right & decrease is
always to the left
Section 2 : Shifts in Demand
Ceteris Paribus- All other
things held constant…
 What causes a shift?
1. Income
 Normal goods- items consumers
demand more of when income
increases
 Steaks, Jewelry, etc.
 Inferior goods- goods consumers
demand less of when income increases
 Hot dogs, ramen noodles, generic
brands
Shifts in Demand Continued
2. Consumer Expectations
 Future prices vs.
present prices
3. Population
 Changes in size or demographics
4. Consumer tastes & advertising
 Ads effect what we buy
 Tastes change over time
Prices of Related Goods
 Complements- two goods bought &
used together
 Peanut butter & Jelly
 Oreo cookies and milk
 Substitutes- goods used in place of
one another
 Butter & margarine
 Cars & motorcycles
Section 3: Elasticity of Demand
Inelastic demand- when you will
still buy a good despite a rise in
the price
Gasoline
Milk
Necessities
Elastic demand- when you will
buy much less of a good after a
small price increase
Designer clothes
DVD/Blu-ray movies
Luxury items
What Affects Elasticity
1. Availability of substitutes
1. Fewer substitutes = more
inelastic (ex: Life saving drug)
2. Importance
1. The more important the item
the more inelastic
1. Necessity vs. Luxury
1. Necessity = inelastic, luxury =
elastic
2. Change over time
1. Elasticity of Demand is
usually greater in the long
run
Calculating Elasticity
 Percentage change= Original Number- New Number
Original Number
 Elasticity= % change in quantity demanded
% change in price
Demand
2
4
Price
5
3
Elastic Demand
Greater then 1
Inelastic Demand
Less then 1
Unitary Demand
= to 1
Examples
1. Demand
6
12
2. Demand
9
7
Price
7
3
Price
25
15
Practice: Find the Elasticity
1. Demand
4
10
2. Demand
14
15
3. Demand
20
10
Price
5
3
Price
30
15
Price
100
50
4. Demand
1000
2000
5. Demand
45
50
6. Demand
7
9
Price
5
2.50
Price
300
350
Price
10
8
Answers
 1) 3.75
 2) .143
 3) 1
 4) 2
 5) .66665
 6) 1.43