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Demand
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Chapter 4: Demand
KEY CONCEPT
Demand is the willingness to buy a good or service and the ability to pay
for it.
WHY THE CONCEPT MATTERS
The concept of demand is demonstrated every time you buy something.
Think of five goods or services that you have purchased. Which of them
would you stop buying if the price rose sharply?
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What is Demand?
The Law of Demand
KEY CONCEPTS
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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
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The Law of Demand
EXAMPLE: Price and Demand
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Law of demand explains consumer behavior as well as economic
concept
Cheryl decides to spend $45 on DVDs
– at $15 each, Cheryl demands three DVDs
– at $5 each, she demands seven DVDs
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Demand Schedules
KEY CONCEPTS
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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
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Demand Schedules
EXAMPLE: Individual Demand Schedule
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Demand schedule is a two-column table
– left-hand column lists various prices of a good or service
– right-hand column gives quantity demanded at each price
Cheryl’s DVD Demand Schedule
– quantity demanded and price have an inverse relationship
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Demand Schedules
EXAMPLE: Market Demand Schedule
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Business owners need information about consumer demand
– helps them price goods to get the most sales
Market research—gather and evaluate data about customer
preferences
Market demand schedule similar to individual demand schedule
– except quantities demanded are larger
– market demand also depends on price
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Demand Curves
KEY CONCEPTS
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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
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Demand Curves
EXAMPLE: Individual Demand Curve
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Demand curve is visual representation of law of demand
– assumes all economic factors except price stay the same
Vertical axis shows prices
Horizontal axis shows quantities demanded
Demand curves slope down from upper left to lower right
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Demand Curves
EXAMPLE: Market Demand Curve
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Market demand curve constructed same way as individual demand
curve
Market demand curve includes all consumers of a product
– quantities demanded are much larger than on individual demand
curve
Illustrates inverse relationship between price and quantity demanded
– assumes all economic factors constant except price
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Vera Wang: Designer in Demand
Responding to Demand
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Sophisticated wedding gowns not available for career women
Wang created line of wedding gowns to meet demand
Style became popular; other designers imitated
Wang created more demand for her style by designing other products
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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demand and law of demand
demand schedule and demand curve
market demand schedule and market demand curve
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What Factors Affect Demand?
More About Demand Curves
KEY CONCEPTS
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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
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Change in Quantity Demanded
KEY CONCEPTS
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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
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Change in Quantity Demanded
EXAMPLE: Changes Along a Demand Curve
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Individual demand curve
– change in quantity demanded shown by movement to right or left
along the curve
Market demand curve
– shows similar information for entire market
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Change in Demand
KEY CONCEPTS
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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
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Change in Demand
FACTOR 1 Income
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A person’s ability to buy goods changes as his or her income changes
As incomes of most consumers in a market change, so does total
demand
– normal goods—demanded more when consumers’ incomes rise
– inferior goods—demanded less when consumers’ incomes rise
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Change in Demand
FACTOR 2 Market Size
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As number of consumers in an area changes, so does market size
Demand for most goods changes as market size changes
– rise in population leads to increased demand
– decrease in population leads to decreased demand
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Change in Demand
FACTOR 3 Consumer Tastes
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Consumer tastes change; products gain and lose popularity
Consumers demand a greater amount of popular items at every price
Sellers advertise to create demand for products
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Change in Demand
FACTOR 4 Consumer Expectations
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Expectations about future price of items affect individual behavior
– expected rise or fall in price can decide whether to buy now or wait
Expectations of all consumers in a market affect demand
– example: because cars go on sale at end of summer, demand
goes up then
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Change in Demand
FACTOR 5 Substitutes
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Substitutes—products used in place of each other
– if price of substitute drops, people buy it instead of original item
– if price of original item rises, people will buy substitute
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Change in Demand
FACTOR 6 Complements
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Complements—goods that are used together
Rise in demand for one increases the demand for the other
If price of one product changes, demand for both changes in same
way
– if price of one rises, demand for both will drop
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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change in quantity demanded and change in demand
income effect and substitution effect
normal goods and inferior goods
substitutes and complements
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What is Elasticity of Demand?
Elasticity of Demand
KEY CONCEPTS
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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
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Elasticity of Demand
EXAMPLE: Elasticity of Demand for Goods and Services
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Goods with substitutes have elastic demand since choices are
available
Needed goods without substitutes have inelastic demand
Elasticity changes if substitutes created or goods taken off market
Unit elastic—same percentage change in price and quantity
demanded
– useful concept for determining elasticity of demand
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What Determines Elasticity?
KEY CONCEPTS
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Three factors affect elasticity of demand
– availability of substitutes
– proportion of income spent on good or service
– whether product is a necessity or luxury
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What Determines Elasticity?
FACTOR 1 Substitute Goods or Services
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If no substitute for a product, demand tends to be inelastic
– when price of insulin goes up, diabetics still need the same
amount
If there are substitutes for a product, demand tends to be elastic
– when price of beef goes up, consumers can buy other meats
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What Determines Elasticity?
FACTOR 2 Proportion of Income
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Demand for expensive items tends to be elastic
– if percentage of income needed to buy item increases, demand
decreases
Demand for inexpensive items tends to be inelastic
– rise in price requires small additional part of income
Rise in income can lead to greater demand for some goods or
services
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What Determines Elasticity?
FACTOR 3 Necessity or Luxury
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Necessity—something needed for life
– demand for necessities is inelastic
Luxury—something desired but not essential
– demand for luxuries tends to be elastic
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Calculating Elasticity of Demand
KEY CONCEPTS
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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?
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Total Revenue Test
KEY CONCEPTS
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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
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Total Revenue Test
EXAMPLE: Revenue Table
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Revenue table shows elasticity of demand by listing
– prices at which item can be sold
– quantity of item demanded at each price
– total revenue received from sale of item at each price
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Reviewing Key Concepts
Use each of these terms in a sentence that gives an
example of the term:
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elastic
inelastic
total revenue
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Case Study: Fueling Automobile Demand
Background
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Demand for automobiles and all services connected with them is high
Car dealers want to sustain and increase demand for their product
What’s the Issue
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How does demand affect your selection of a vehicle?
Thinking Economically
1. How would the demand for automobiles be affected by information
presented in each of these documents? Support your answer with
examples from the documents.
2. Identify and discuss the factors that affect elasticity of demand
illustrated in these documents.
3. Explain how Documents B and C illustrate a cause and effect
relationship in the demand for SUVs. Use evidence from these
documents to support your answer.
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