Download Demand - tellezworld

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.