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 curve for Snuggies 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 Qty. Demanded $50 $20 5 $15 10 $10 27 $5 47

Demand Curve A demand curve is a graph showing the quantity demanded at each and every price that might prevail in a market. The demand curve goes DOWN!

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

Change in Quantity Demanded 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.

Income Effect and Substitution Effect The income effect is a change in quantity demand (movement ON the line) because a change in price alters consumers’ real income. The substitution effect is the change in quantity demanded because of a change in the relative price of an item. (Example – Substituting substituting a concert ticket for a CD)

Change in Demand A change in demand occurs because people are now willing to buy different amounts of the product at the same prices. A CHANGE IN DEMAND WILL RESULT IN AN ENTIRELY NEW DEMAND CURVE. (oh shift!)

What Changes Demand? Consumer income Consumer tastes Substitutes Complements (you look nice today!) Change in expectations 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!).

Substitutes A change in the price of related products can cause a change in demand. Substitutes can be used in place of other products.

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

Elasticity 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.

Demand Elasticity Demand Elasticity is the extent to which a change in price causes a change in the quantity demand

Elastic “Elastic” is when a given change in price causes a relatively larger change in quantity demanded.

Perfectly Elastic Product

Inelastic Demand Inelastic means that a given change in price causes a relatively smaller change in the quantity demanded.

Perfectly INELASTIC Demand Curve

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 -0.1 Oil -0.4 World Rice -0.47 Austria -0.8 Bangladesh -0.8 China -0.25 Japan -0.55 US Beef -1.6 US Legal gambling -1.9 US -0.80 to -1.0 Indiana/Kentucky Movies -0.87 US -0.2 Teenagers US -2.0 Adults US Medical insurance -0.31 US Bus travel -0.20 US Insulin -0.01 daily users US Ford compact automobile 2.8 Coke 3.8 Mountain Dew 4.4

What determines demand elasticity? Can the purchase be delayed? Are adequate substitutes available? Does the purchase use a large portion of income?