Economics Chapter 4 Demand

What is Demand? “Demand” for a product means more than simply the desire to own it. demand includes desire and also the willingness and ability to buy the product. Microeconomics is the part of economic theory that deals with behavior and decision making by individual units, such as people and firms.

The Law of Demand For every good or service that we might buy, higher prices are associated with smaller amounts demanded. Conversely, lower prices are associated with larger amounts demanded. + This is known as the Law of Demand, which states that the quantity demanded varies inversely with its price. When the price of something increases, the quantity demanded decreases. Likewise, when the price goes down, buyers have an incentive to purchase more, and so the quantity demanded goes up.

Marginal Utility Marginal utility—the extra usefulness or additional satisfaction a person gets from acquiring or using one more unit of a product. It’s important because it explains so much about demand. The reason we buy something in the first place is because we feel that the product is useful and will give us utility, or satisfaction. As we use more and more of a product, we encounter diminishing marginal utility. That means that the extra satisfaction we get from using additional quantities of the product begins to decline. We usually are not willing to pay as much for the second, third, and fourth unit, and so on, as we did for the first.

Factors Affecting Demand Chapter 4 Lesson 2

Income Effect Only price changes the quantity demanded. Lots of things can affect the demand curve, but price is the only factor that can cause movement along the demand curve. When the price of a product drops, consumers pay less and, as a result, have some extra income to spend. If the price had gone up, consumers would feel poorer and as a result buy less. This illustrates the income effect, the change in quantity demanded because of a change in price that alters consumers’ income.

The Substitution Effect The substitution effect is the change in quantity demanded because of a shift in relative prices of another product. Change in demand- happens when people decide to buy different amount of a product at the same price.

Factors that Affect Demand Consumer Income- When people earn more money they are willing to pay slightly higher prices. Consumer Tastes- Consumers often change their minds about which products to buy. Advertising, fashion trends, peer group pressure and even changes in the season can affect consumer choices. Substitutes- A change in the price of related products can cause a change in demand. Some products are known as substitutes because they can be used in place of other products.

Factors that Affect Demand Compliments- Other related goods are known as complements, because the use of one increases the use of the other. Expectations- The way people feel about the future can also affect demand.