Download Chapter 4 notes: Demand

Economics
Unit II:
Microeconomics
Chapter 4:
Demand
Economics Chapter 4: Demand
Why is it important to understand Demand?
• A knowledge of demand is essential in
understanding how a market economy works.
• Knowledge of demand is also important for sound
business planning.
**Lifestyle changes can create new market demand.
Economics Chapter 4: Demand
• Demand is the desire, ability, and
willingness to buy a product.
• An individual demand curve
illustrates how the quantity that a
person will demand varies depending
on the price of a good or service.
Economics Chapter 4: Demand
• Economists analyze demand by listing
prices and desired quantities in a
demand schedule (chart).
• When the demand data is graphed, it
forms a demand curve with a
downward slope.
Economics Chapter 4: Demand
1st left page Question #1:
Record the names and approximate prices of the
last two items you purchased. In general, would
you have spent your money differently if the
price of each item was twice as high? Would you
have spent your money differently if each of the
items cost half as much as it did? Explain your
response in complete sentences.
Economics Chapter 4: Demand
• The Law of Demand states that the
quantity demanded of a good or
service varies inversely with its
price. When prices go up, the
quantity demanded goes down; when
price goes down, the quantity
demanded goes up.
Economics Chapter 4: Demand
• A market demand curve illustrates
how the quantity that all interested
persons (the market) will demand
varies depending on the price of a
good or service.
Economics Chapter 4: Demand
1st left hand page Question #2:
Why is price a consumer’s obstacle to
buying? Explain your answer
Economics Chapter 4: Demand
• Marginal Utility is the extra
usefulness or satisfaction a person
receives from getting or using one
more unit of a product.
Economics Chapter 4: Demand
• The principle of diminishing marginal utility
states that the satisfaction we gain from
buying a product lessens as we buy more of
the same product.
• Example is buying a soda. For each one you
consume, your satisfaction or usefulness
goes down.
Economics Chapter 4: Demand
1st left hand page question #3:
• What is another case in which more
product gives less satisfaction?
Explain your answer.
Economics Chapter 4: Demand
Factors Affecting Demand
1. The change in the quantity demanded
shows a change in the amount of a
product purchased when there is a
change in price.
Economics Chapter 4: Demand
• The income effect means that as
prices drop, consumers are left with
extra real income.
• The substitution effect means that
price can cause consumers to
substitute one product with another
similar but cheaper item.
Economics Chapter 4: Demand
2nd left hand page question #1: Imagine
you have a weekly budget for
groceries. When you shop one week,
certain items you needed were on
sale, and after you paid the cashier,
you had $20 left. What would you do
with the extra money? Explain
Economics Chapter 4:
Demand
2. A change in demand is when people
buy different amounts of the
product at the same prices.
Economics Chapter 4: Demand
• A change in demand can be caused by
a change in income (+/-), tastes, a
price change in a related product
(either because it is a substitute or
complement), consumer expectations
(future new technology or future rise
in price or shortage), and the number
of buyers (new and leavers).
Economics Chapter 4: Demand
• Substitutes: can be used in place of
other products.
• Example is butter and margarine
• Generally, the demand for a product
tends to go up if the price of its
substitute price goes up and vice
versa.
Economics Chapter 4: Demand
• Compliments: related products that
increase the value of each other;
products related in such a way that
an increase in price of one reduces
the demand for both.
• Example is computers and computer
software.
Economics Chapter 4: Demand
2nd left page Question #2:
Although CDs are by far today’s most
popular form of musical recording,
interest in vinyl albums is growing.
What might happen to the demand
for vinyl albums as interest
increases? Explain.
Economics Chapter 4: Demand
• Elasticity measures how sensitive
consumers are to price changes.
• Demand is elastic when a change in
price causes a large change in
demand.
Economics Chapter 4: Demand
• Demand is inelastic when a change in
price causes a small change in
demand.
• Demand is unit elastic when a change
in price causes a proportional change
in demand.
Economics Chapter 4: Demand
2nd left hand page Question #3:
What are some examples of items for
which an increase in price would
cause you or your family to
reconsider buying them? Give at
least 3 examples and explain why you
would reconsider buying them.
Economics Chapter 4: Demand
The Total Expenditures Test
Price x quantity demanded = total
expenditures
Economics Chapter 4: Demand
• Changes in expenditures depend upon the
elasticity of a demand curve – if the
change in price and expenditures move in
opposite directions on the curve, the
demand is elastic (↓ ↑) ; if they move in the
same direction (↑ ↑ ), the demand is
inelastic; if there is no change in
expenditures, demand is unit elastic.
Economics Chapter 4: Demand
• Understanding the relationship
between elasticity and profits can
help producers effectively price
their products.
Economics Chapter 4: Demand
3rd left page Question #1:
What are some examples of items for which
a drop in price would not encourage you to
buy more of an item? Give at least 3
examples and explain your reasons you
would not buy more of it.
Economics Chapter 4: Demand
Determinants of Demand Elasticity
• Demand is elastic if the answer to
the following questions are “yes.”
1. Can the purchase be delayed? (some
purchases cannot be delayed,
regardless of price changes).
Economics Chapter 4: Demand
2.Are adequate substitutions available?
(Price changes can cause consumers to
substitute one product for a similar
product).
3. Does the purchase use a large portion of
income? (demand elasticity can increase
when a product commands a large portion
of a consumer’s income).
** Glue chart here **
Economics Chapter 4: Demand
3rd left hand page Question #2:
What are some things you buy for
which price is not the issue? At least
3 examples. Explain why price is not
an issue for each.
Economics Chapter 4: Demand
4th left hand page Question 1:
• Bring in an advertisement for a
product. Glue it in your notebook.
List things in the advertisement that
appeal to you in the ad. Explain how
the advertiser tries to get you to buy
the product.
Economics Chapter
4: Demand
The End