DEMAND Chapter 4

I. Demand and the Price Effect A.Demand (pg 85) Quantity of good or service people are WILLING and ABLE to buy at any given price B.Law of Demand (pg 85) Consumers will buy more of G &S at lower prices, and less at higher prices

2 (3) ‘Patterns’ or reasons for the Law of Demand, aka The Price Effect 1.Substitution Effect (pg 87) Consumers react to price changes due to availability of substitutes 2.Income Effect (pg 87) Change in consumption due to the effect spending has on real income

But WAIT! There’s more! A third reason for the price effect (NOT in the book)… 3.Law of Diminishing Marginal Utility Point reached when the next item consumed is less satisfying – too much stuff! *Utility: Satisfaction

C. Individual D versus Market D Individual: what you are willing and able to pay Market: what a community/society/group is willing and able to pay

D. Schedules and Curves Schedule: a chart that shows the relationship between price and quantity (see page 89) Curve: a graph that shows the relationship between price and quantity (see page 90)

Looking at Curves Graph that shows all the price/quantity combinations Curve slopes down and to the right Demand is an entire curve – NOT just one point on a curve!

P Q $10 $ NOT a Single Point! The WHOLE Line! All points!

II. Change in Demand Demand Curves will ‘shift’ up or down depending on the following factors: 1.Change in income Income rises, people can spend more money and vice-versa (income effect)

2.Price and availability of substitutes Change in one thing effects its substitutes 3.Price/availability of Complementary goods Things used together effect each other

4.Change in Weather or Season Change in weather effects demand for certain things 5.Change in the number of buyers Population changes effects demand 6.Change in styles, tastes or habits Fads and fashion

7.Change in expectations Future predictions effect demand

III. Price Elasticity A.Elasticity of Demand 1.Measurement of the impact of the price effect 2.Shows buyer’s eagerness to buy a product

B.If effect is large, the demand is elastic C.If effect is small, the demand is inelastic D.In other words… 1.Some products people will stop buying even when there is a small change in the price effect (elastic) 2.The reverse is inelastic…

E.Elasticity is different for various goods because 1.Availability of Substitutes (more available, more elastic) 2.Percentage of budget (higher % of budget, the more elastic) 3.Time (the longer people have to adjust, the more elastic) 4.Luxury vs. Necessity

Elastic Products … Coca Cola

Inelastic Products… Energy Sources… Medical Services

Elastic Graph 1 6 Q P $10 $60

1 6 P $10 $60 Inelastic Graph Q