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CHAPTER 4: DEMAND Pgs. 97 to 123 SECTION 1: DEMAND: A DEFINITION Demand is the willingness to buy a good or service and the ability to pay for it. It is important to note that in economic terms true demand must have both the willingness and ability to pay. Demand along with supply involve looking at people’s behaviors which is a part of microeconomics. THE LAW OF DEMAND Price is a major influence of demand. The law of demand states that when the price of a good or service falls, consumers buy more of it. As the price of a good or service increases, consumers usually buy less. DEMAND SCHEDULES A demand schedule simply takes the law of demand graph and forms into a chart. A market demand schedule shows the demand of all consumers for a given good or service. DEMAND CURVES The demand curve shows in graph form how much of a good or service an individual will buy at each price (Individual Demand Schedule). Just as with demand schedules, demand curves can be shown in a market form. SECTION 2: FACTORS OF DEMAND The law of diminishing marginal utility explains why the demand curve slopes downward. It states the marginal benefit from using each additional unit of a good or service during a given time period tends to decline as each is used. Think about when you eat or drink, the first serving or drink is always more satisfying than the next or the next after that. WHY DEMAND MORE WHEN PRICES ARE LOW OR LESS WHEN THEY ARE HIGH? Income Effect: This is when demand is effected because your purchasing power changes. This does not mean that your physical income increases but rather how much you feel your money is worth. Substitution Effect: This is when consumers react to a change in price by buying a substitute product. CHANGES IN DEMAND A change in demand is reflected on the graph when the entire curve shifts to the right or left. There are 6 factors that can cause this to occur: 1. Income 2. Market Size (Changes as the # of consumers change) 3. Consumer Tastes (Trends and what is popular) 4. Consumer Expectations (Anticipated change) 5. Substitute Goods 6. Complementary Goods (Think about accessories) SECTION 3: ELASTICITY OF DEMAND Elasticity of demand describes how responsive consumers are to price changes in the marketplace. Elastic when a change in price prompts a huge shift in overall demand and inelastic when that change in demand is small. Take a look at figure 4.13 and 4.14 on page 118 to see the difference between the two. FACTORS OF ELASTICITY 1. Substitute Goods or Services: The less substitutes the more inelastic and the more substitutes the more elastic. 2. Proportion of Income: The amount of income that you usually spend on something influences your demand. 3. Necessities vs. Luxuries: What you need vs. what you would like to have. CALCULATING ELASTICITY Businesses use elasticity to determine where to make price cuts because if it is inelastic then price cuts will not help. #1: Original Quantity Minus New Quantity Divided By Original Quantity Time 100 = Percentage change in quantity demanded #2: Original Price Minus New Price Divided by Original Price Times 100 = Percentage change in price #3 Percentage change in quantity demanded Divided by percentage change in price = Elasticity. *If the result is greater than one then it is elastic, less than one then it is inelastic TOTAL REVENUE Total Revenue = Price Times Quantity Sold You can now plug in various prices to see what price will produce the greatest total revenue.