Demand Chapter 4

What is Demand? Demand- the desire, ability, and willingness to buy a product. Microeconomics- the area of economics that deals with behavior and decision making by small units, such as individuals and firms. A knowledge of demand is essential to understand how a market economy works. Knowledge of demand is important for sound business planning.

How do Economists illustrate demand? #1: Demand Schedule- a listing that shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time. PriceQuantity Demanded $30 0 $25 0 $20 1 $15 3 $10 5 $ 5 8

How do Economists illustrate demand? #2: Demand Curve- a graph showing the quantity demanded at each and every price that might prevail in the market. Price Quantity Demanded

Demand Schedule/Demand Curve PriceQuantity Demanded $ 30 0 $25 0 $20 1 $15 3 $10 5 $ 5 8 Demand Curve Quantity Demanded Price

The Price of the Candy BarThe Amount You Would Buy $.50 cents $.75 cents $.1.00 $1.50 $2.00 You have $5.00, how much are you willing to use to purchase a candy bar?

The Law of Demand The Law of Demand- states that the quantity demanded of a good or service varies inversely with its price. When price goes up, quantity demanded goes down. When prices goes down, quantity demanded goes up.

Demand and Marginal Utility Utility=usefulness Marginal utility- the extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product. Diminishing Marginal Utility- states that the extra satisfaction we get from using additional quantities of a product begins to diminish. Because of the diminishing satisfaction, we are not willing to pay as much for the second, third, fourth, etc. as we did the first.

Demand and Marginal Utility Diminishing Marginal Utility is why the demand curve is downward-sloping. Individuals get the most satisfaction from the first purchase and they get less satisfaction from the second, and even less from the third- so they simply are not willing to pay as much for the additional products

Factors Affecting Demand Change in the quantity demanded- a movement along the demand curve that shows a change in the quantity of a product purchased in response to a change in price.

A change in quantity demanded When prices drop, consumers pay less for the product and, as result, have some extra real income to spend. Income effect- the change in quantity demanded because of a change in the price that alters consumers’ real income.

A change in quantity demanded The substitution effect- is the change in quantity demanded because of the change in the relative price of the product. Example: A CD would be less expensive than other goods and services such as concerts and movies.

A change in quantity demanded Whenever a change in price causes a change in the quantity demanded, the change appears graphically as a movement along the demand curve. The demand curve does NOT shift