4.1 UNDERSTANDING DEMAND CHAPTER 4 DEMAND

 DEMAND: the desire to own something and the ability to pay for it  Summer Blow Out Sale Summer Blow Out Sale

The Law of Demand  Definition: when a good’s price is lower, consumers will buy more of it & when its price is higher, consumers will buy less of it P, QD ~OR~P, QD  Law of demand is a result of 2 overlapping patterns:

#1: Substitution Effect  Definition: when a consumer reacts to an increase in a good’s price by consuming less of that good and more of other goods  EXAMPLE: if price of pizza increases, you buy less pizza and more tacos

#2: Income Effect  Definition: the change of consumption resulting from a change in income  EXAMPLE: your income increases, so you buy more pizza

The Demand Schedule  Definition: a table that lists the quantity of a good that a person will purchase at each price in the mkt.  Market Demand Schedule: shows demand of every buyer in the mkt.

Demand Graph  Demand Curve: graphic representation of a demand schedule Shows relationship b/t price and quantity of demanded good

4.2 SHIFTS IN THE DEMAND CURVE CHAPTER 4 DEMAND

CHANGES IN DEMAND  Change in Demand  when factors (other than price) change, the entire Demand Curve shifts  WHAT CAUSES SHIFTS?

#1: INCOME  Normal good: good consumer demands more of when income increases Most goods are normal  Inferior good: good consumer demands more of when income decreases  Increased income = shift to the right = increase in demand  Decreased income = shift to the left = decrease in demand Bologna sandwiches, used furniture, used clothing etc.

#2: CONSUMER EXPECTATIONS  Expectations of higher prices in the future causes immediate demand to increase ~OR~ VICE VERSA

#3: POPULATION  As population (or market size) increases, so does demand  Market size = consumers + producers

#4: CONSUMER TASTES AND ADVERTISING  Trends always change (bell- bottoms)  Advertisements can make, or break, a company

#5: PRICES OF RELATED GOODS  Demand curve of 1 good can be affected by changes in demand of another  Complements: 2 goods bought & used together  Substitutes: goods used in place of one another

CHAPTER 4 DEMAND 4.3 ELASTICITY OF DEMAND

INTRO  Elasticity of demand: a measure of how consumers react to changes in price  Inelastic: demand is NOT responsive to price change You’ll keep buying it despite price  Elastic: demand is responsive to change You’ll buy much less of it if price increases

Calculating Elasticity  Step 1 Find Percentage Change for quantity demanded and price change Original # - New # x 100 Original # Step 2 Determine Elasticity % change in quantity demanded % change in price

Calculating Elasticity  Elastic Demand Greater then 1  Inelastic Demand Less then 1  Unitary Demand = to 1

ELASTIC DEMAND: MORE HORIZONTAL INELASTIC DEMAND: MORE VERTICAL

FACTORS CAUSING ELASTIC DEMAND  #1: Large number of substitutes  #2: Large portion of the consumer’s income  #3: It is a luxury

FACTORS CAUSING INELASTIC DEMAND  #1: No substitutes  #2: Small portion of the consumer’s income  #3: It is a necessity

TOTAL REVENUE (total receipts)  Total Income Of A Business The price of each good multiplied by the number of goods sold  TR does Not Reflect The Cost Of Doing Business

ELASTICITY AND REVENUE 1.Elastic Demand – 1.prices, TR 2.Prices, TR 2.Inelastic Demand – 1.prices, TR 2.prices, TR

TOTAL REVENUE