Chapter 4 Demand

Section 1- Understanding Demand Law of Demand- Consumers buy more of a good when its price decreases and less when its price increases

Substitution Effect- When consumers react to an increase in a good’s price by consuming less of that good and more of other goods

Income Effect- the change in consumption resulting from a change in real income If you get a raise you buy more, if you get fired you buy less

Demand Schedule Price .50 1.00 1.50 2.00 2.50 3.00 Quantity 5 4 3 2 1

Demand Curve- graphic representation of a demand schedule Note: Increase is always to the right & decrease is always to the left

Section 2 : Shifts in Demand Ceteris Paribus- All other things held constant…

What causes a shift? 1. Income Normal goods- items consumers demand more of when income increases Steaks, Jewelry, etc. Inferior goods- goods consumers demand less of when income increases Hot dogs, ramen noodles, generic brands

Shifts in Demand Continued 2. Consumer Expectations Future prices vs. present prices 3. Population Changes in size or demographics 4. Consumer tastes & advertising Ads effect what we buy Tastes change over time

Prices of Related Goods Complements- two goods bought & used together Peanut butter & Jelly Oreo cookies and milk Substitutes- goods used in place of one another Butter & margarine Cars & motorcycles

Section 3: Elasticity of Demand Inelastic demand- when you will still buy a good despite a rise in the price Gasoline Milk Necessities

Elastic demand- when you will buy much less of a good after a small price increase Designer clothes DVD/Blu-ray movies Luxury items

What Affects Elasticity Availability of substitutes Fewer substitutes = more inelastic (ex: Life saving drug) Importance The more important the item the more inelastic

Necessity vs. Luxury Change over time Necessity = inelastic, luxury = elastic Change over time Elasticity of Demand is usually greater in the long run

Calculating Elasticity Percentage change= Original Number- New Number Original Number Elasticity= % change in quantity demanded % change in price Demand Price 2 5 4 3

Elastic Demand Greater then 1 Inelastic Demand Less then 1 Unitary Demand = to 1

Examples 1. Demand Price 6 7 12 3 2. Demand Price 9 25 7 15

Practice: Find the Elasticity 1. Demand Price 4 5 10 3 2. Demand Price 14 30 15 15 3. Demand Price 20 100 10 50 4. Demand Price 1000 5 2000 2.50 5. Demand Price 45 300 50 350 6. Demand Price 7 10 9 8

Answers 1) 3.75 2) .143 3) 1 4) 2 5) .66665 6) 1.43