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Transcript
Chapter Introduction Section 1: What is Demand? Section 2: Factors Affecting Demand Section 3: Elasticity of Demand Visual Summary Think about the items you bought during the past two months. What influenced your purchases? Did you need the items, or did you buy them because you wanted them? Make a list of the items, and next to each one write why you bought it. Then add for each item whether you would have bought more if the price had been lower, or fewer had the price been higher. Read Chapter 4 to learn how economists interpret your actions. Markets exist when buyers and sellers interact, and market prices are set by the interaction of demand and supply. Section Preview In this section, you will learn that you express demand for a product when you are willing and able to purchase it. Content Vocabulary • demand • demand curve • microeconomics • Law of Demand • market economy • market demand curve • demand schedule Academic Vocabulary • marginal utility • diminishing marginal utility What is Demand? • Demand for a product is more than having the desire to own an item. Demand includes the ability and willingness to pay for it. • Microeconomics is the part of economic theory that deals with behavior and decision making by individuals and firms. An Introduction to Demand Demand is a concept specifying the different quantities of an item that will be bought at different prices. An Introduction to Demand (cont.) • Demand is central to a market economy. • Demand involves two variables: – Price – Quantity of a specific product at a given point in time The Demand for Compact Digital Discs An Introduction to Demand (cont.) • A demand schedule shows the various quantities demanded of a good at all prices that might prevail in the market at a given time. • A demand schedule shown graphically is a demand curve. The Demand for Compact Digital Discs The Law of Demand There is an inverse relationship between the price of an item and the quantity demanded. The Law of Demand (cont.) • Higher prices are associated with smaller amounts demanded on most goods or services we buy. This is the Law of Demand. – Quantity demanded varies inversely with its price. • The market demand curve shows quantities demanded by everyone in the market who is interested in the product/service. Individual and Market Demand Curves Demand and Marginal Utility As we buy more of an item, we get less satisfaction from each additional purchase. Demand and Marginal Utility (cont.) • Utility is the amount of product satisfaction or usefulness one receives from its use. • Marginal utility explains much about demand. • As we use more of a product, we encounter diminishing marginal utility. Section Preview In this section, you will learn about the factors that cause changes in demand. Content Vocabulary • change in quantity demanded • income effect • substitution effect • change in demand • substitutes • complements Academic Vocabulary • principle • illustrated Change in the Quantity Demanded Only a change in price can cause a change in quantity demanded. Change in the Quantity Demanded (cont.) • When only the price changes and all else remains constant, there is a change in the quantity demanded. – Income effect – Substitution effect • A change in quantity demanded is a movement along the original demand curve. Change in the Quantity Demanded Change in Demand Several factors can cause the demand curve to shift. Change in Demand (cont.) • Factors other than price can cause a change in demand. • A change in demand results in an entirely new demand curve. Change in Demand Change in Demand (cont.) • Factors for demand changes – Consumer income – Consumer tastes – Price of related goods • Substitutes • Complements Change in Demand Change in Demand (cont.) – Expectations – Number of consumers Change in Demand Section Preview In this section you will learn about the factors that influence the size of a change in quantity demanded. Content Vocabulary • elasticity • inelastic • demand elasticity • unit elastic • elastic Academic Vocabulary • technical • adequate Elasticity of Demand • An important cause-and-effect relationship in economics is elasticity. Profiles in Economics: Oprah Winfrey Demand Elasticity When the price of an item changes, the change in quantity demanded can vary a little or a lot. Demand Elasticity (cont.) • Consumers react to changes in price by changing the quantity demanded. The size of the reaction is demand elasticity. • Demand can be – Elastic—fresh produce – Inelastic—table salt – Unit elastic Demand Elasticity and the Total Expenditures Test The Total Expenditures Test The total expenditures test is used to estimate the demand elasticity of a product. The Total Expenditures Test (cont.) • Total expenditures—the price of a product multiplied by the quantity demanded for any point along the demand curve. • Can test for elasticity by observing the change in total expenditures when the price changes. Three results occur: – Elastic demand—an “inverse” relationship between price and expenditures The Total Expenditures Test (cont.) – Inelastic demand—movement occurs in the same direction – Unit elastic—no change in expenditure • Elasticity and revenues – Raising the price of an inelastic product may help increase revenue. – Raising the price of an elastic product will likely decrease revenue. Determinants of Demand Elasticity The answers to three questions help determine a product’s demand elasticity. Determinants of Demand Elasticity (cont.) • Must answer three questions to determine if a demand for a good is elastic or inelastic. – Can the purchase be delayed? – Are adequate substitutes available? – Does the purchase use a large portion of income? Determinants of Demand Elasticity Law of Demand The Law of Demand states that when the price goes up, quantity demanded goes down. When the price goes down, quantity demanded goes up. Change in Demand When a change in demand occurs, people want to buy different amounts of a product at the same price. A change in demand can happen for several reasons. Demand and Elasticity Changes in price and total expenditures help determine the demand elasticity of a product. Oprah Winfrey (1954– ) • first woman in history to produce and own her own talk show • first African American woman—and third woman in history—to own a major television and film studio demand combination of desire, ability, and willingness to buy a product microeconomics part of economics that studies small units, such as individuals and firms market economy economic system in which people and firms make all economic decisions demand schedule a table that lists how much of a product consumers will buy at all possible prices demand curve a curve that shows the quantities demanded at all possible prices Law of Demand rule stating that consumers will buy more of a product at lower prices and less at higher prices market demand curve a curve that shows how much of a product all consumers will buy at all possible prices marginal utility additional satisfaction or usefulness a consumer gets from having one more unit of the same product diminishing marginal utility decrease in satisfaction or usefulness from having one more unit of the same product prevail to predominate inversely in the opposite way change in quantity demanded movement along the demand curve showing that the amount someone is willing to purchase changes when the price changes income effect that part of a change in quantity demanded due to a change in the buyer’s real income when a price changes substitution effect that part of a change in quantity demanded due to a price change that makes other products more or less costly change in demand shift of the demand curve when people by different amounts at every price substitutes competing products that can be used in place of one another complements products that increase the use of other products principle a fundamental law or idea illustrated shown with an image elasticity a measure of responsiveness that shows how one variable responds to a change in another variable demand elasticity a measure that shows how a change in quantity demanded responds to a change in price elastic type of elasticity where a change in price causes a relatively larger change in quantity demanded inelastic type of elasticity where a change in price causes a relatively smaller change in quantity demanded unit elastic type of elasticity where a change in price causes a proportional change in quantity demanded technical related to a particular subject such as art, science, or trade adequate just enough to satisfy a requirement To use this Presentation Plus! product: Click the Forward button to go to the next slide. 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