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Economics Chapter 4 Demand Demand Demand is the desire, ability and willingness to buy a product. Demand is a microeconomics concept. Microeconomics is the area of economics that deals with behaviors and decisions made by small units such as individuals and firms. Demand Schedule A demand schedule is a listing that shows the various quantities demand of a particular product at all prices that might prevail in a market. Demand curve for Snuggies Price $50 $20 $15 $10 $5 Qty. Demanded 0 5 10 27 47 Demand Curve A demand The demand curve goes DOWN! curve is a graph showing the quantity demanded at each and every price that might prevail in a market. Law of Demand The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. Market Demand Curve A market demand curve shows the quantity demanded by everyone who is interested in purchasing the product. Marginal Utility Marginal utility is the extra usefulness or satisfaction that a person gets from acquiring or using one more unit of a product. Extra lollipops bring Erick extra utility! Diminishing Marginal Utility The principle of diminishing marginal utility states that the extra satisfaction we get from using additional quantities of the product begins to diminish. Think of eating contests or block days at KHS! Section 2 When there is a change in a people’s willingness and ability to buy, it typically falls in one of two categories – Change in QUANTITY DEMANDED OR CHANGE IN DEMAND I. Change in Quantity Demanded A. A change in quantity demanded is a movement ALONG the demand curve that shows a change in the quantity of the product purchased in response to a change in PRICE. B. Income Effect The income effect is a change in quantity demanded (movement ON the line) because a change in price alters consumers’ real income. C. Substitution Effect The substitution effect is the change in quantity demanded because of a change in the relative price of an item. (Example – Substituting a concert ticket for a CD) II. Change in Demand A. A change in demand occurs because people are now willing to buy different amounts of the product at the same prices. B. A CHANGE IN DEMAND WILL RESULT IN AN ENTIRELY NEW DEMAND CURVE. (shift!) III. What Changes Demand? Skip Lines to explain between A. Consumer income B. Consumer tastes C. Substitutes D. Complements E. Change in expectations F. Change in the number of consumers Consumer Income Changes in consumer income can cause a change in demand. Example – you get a raise or you lose your job Consumer Tastes Consumers do not always want the same thing. Example – change in fashion, style, the development of new products More on Changing Tastes… Changing tastes shift demand curves (and can actually be quite amusing after a few years!). C. Substitutes A change in the price of related products can cause a change in demand. Substitutes can be used in place of other products. D. Complements Related goods are known as complements because the use of one increases the use of the other. Example – peanut butter and jelly, hotdogs and hotdog buns E. Changes in Expectations Refers to the way people think about the future Willingness to buy more at each and every price Iphone 5 release date… F. Change in # of consumers Test Wed- CH 4 Assignment- Due tomorrow 1. Create 2 demand schedules and a chart for each. Represent a change in Demand on one and a change in Quantity demanded on the other. Make sure the graphs are labeled… 2. Explain the difference between a change in demand and change in quantity demanded. 3. Explain how a change in price affects the demand for a product’s substitute 4. Explain how the income effect explains the change in quantity demanded when the price goes down. Section 3- Elasticity of Demand Explain why elasticity is a measure of responsiveness Factors that determine demand elasticity I. Elasticity- cause and effect A. Elasticity is the measure of responsiveness that tells us how a dependent variable such as quantity responds to a change in an independent variable such as price. B. If one things how will it affect something else. II.Demand Elasticity Demand Elasticity is the extent to which a change in price causes a change in the quantity demand A. Elastic Demand “Elastic” is when a given change in price causes a relatively larger change in quantity demanded. Stretches as price changes Perfectly Elastic Product B. Inelastic Demand Inelastic means that a given change in price causes a relatively smaller change in the quantity demanded. Perfectly INELASTIC Demand Curve C. Change in Price A. B. If change in price causes a relatively larger change in the quantity demanded, demand is elastic If change in price causes a relatively smaller change in the quantity demanded, demand is inelastic D. Unit Elastic Demand Unit elastic means that a given change in price causes a proportional change in the quantity demanded. Selected Elasticities Cigarettes -0.3 to -0.6 US population -0.6 to -0.7 US children Airline travel -0.3 First Class US -0.4 Unrestricted Coach US -0.9 Discount Local newspapers Oil -0.4 World Rice -0.1 -0.47 Austria -0.8 Bangladesh -0.8 China -0.25 Japan -0.55 US Beef Legal gambling -1.6 US -1.9 US -0.80 to -1.0 Indiana/Kentucky Movies -0.87 US -0.2 Teenagers US -2.0 Adults US Medical insurance Bus travel Insulin Ford compact automobile Coke Mountain Dew -0.31 US -0.20 US -0.01 daily users US 2.8 3.8 4.4 III. Total Expenditures Test A. B. Used to estimate demand elasticity Multiply Price by Qty demanded along any point on curve. pg 103 IV.What determines demand elasticity? A. B. C. D. Can the purchase be delayed? Yes = elastic Create a chart like the one on pg. 106 Are adequate substitutes available? If yes- consumers can take advantage of best price= elastic Does the purchase use a large portion of income? Yes = elastic Assignment: A. B. Pg. 107 #’s 4-6 Use complete sentences and details