If all resources are devoted to the production of food, Alpha can produce ___________pounds of food. In order to produce 1,500 WMD, the opportunity cost in terms of food is_________ pounds.

Chapter 4 The Law of Demand

What is Demand? Quantity demanded of a product or service is the number that would be bought by the public at a given price.

The Law of Demand When a good’s price is lower, consumers will buy more of it. When a good’s price is higher, consumers will buy less of it. What are some reasons why demand would increase?

The Law of Demand The Law of Demand is called a “law” because it has proven true after repeated studies and tests, and it is consistent with common sense and observation.

Demand Schedule A demand schedule shows the likely number of purchases based on a series of arbitrarily chosen prices.

Demand Schedule

Demand Schedule › Demand Curve

Demand Curve Individual demand curve shows the price and quantity of a product demanded by an individual. A market demand curve shows the quantities of a product demanded by everyone who is interested in purchasing it at all possible prices.

Individual & Market Demand Curves

Answer the following questions 1. Exchanging the use of one thing for another. 2. Study of choices. 3. Limited resources, unlimited wants. 4. All combinations of goods and services that can be produced from a fixed amount of resources in a given period of time 5. Value of the next best alternative.

Demand and Marginal Utility Marginal utility is the extra satisfaction or additional usefulness obtained by acquiring multiple units of a product. As we use more and more of a product, the extra satisfaction we get from using additional quantities begins to decline; this is known as diminishing marginal utility. Because of diminishing marginal utility, people are not usually willing to pay as much for the second, third, or fourth unit as they did for the first unit.

Marginal Utility & Diminishing Marginal Utility

Consumer tastes change. A Shift in Demand When a shift in demand occurs, the entire demand curve shifts to the left or right. This occurs when: A change in total consumer income affects how much of a product consumers buy at all possible prices. Consumer tastes change. An increase in the price of a product causes an increase in demand for substitute products and a decrease in demand for the product’s complements. Changes in Consumer expectations. A change in the total number of consumers 14

A Change (Shift) in Demand If one of the other factors changes, the entire demand curve will shift to the left or right. The curve does NOT shift if the price of the good is the only change.

The Substitution Effect As the price for one good rises compared to a similar good, consumers will substitute the similar good for their purchases. A shift in relative prices may cause a substitution effect, in which consumers substitute an alternative less expensive product for one that has become more expensive.

Substitution Effect

The Income Effect The income effect is a change in quantity demanded because of a change in price that makes consumers feel richer or poorer. As prices go up, your money becomes worth less than it was worth before People are less likely to buy the good now

A Change in Demand (Graph)

A Change in Quantity Demanded (Graph)

Income When people’s income changes, demand shifts accordingly Normal Goods – Higher income = higher demand Lower income = lower demand

Income When people’s income changes, demand shifts accordingly Inferior Goods – Higher income = lower demand Lower income = higher demand

Consumer Expectations If consumers expect a price to rise in the future, current demand increases. If consumers expect a price to fall in the future, current demand decreases.

The number of consumers When one sector of the population grows, demand increases for products that sector uses. Fastest growing sector of the population today? Old People

Consumer Tastes and Advertising Increased advertising can increase consumer demand. Bad news about a product can decrease demand.

Price of Related Goods Complimentary Goods – goods that are bought and used together. Higher Complementary Price = decrease in demand Lower Complementary Price = increase in demand

Price of Related Goods Substitute Goods – goods that are used in place of one another Higher Substitute Price = increase in demand Lower Substitute Price = decrease in demand

Elasticity of Demand Elasticity refers to how responsive the quantity demanded is to a change in prices

Elasticity of Demand An inelastic good will still sell about the same quantity even if the price goes up or down

Elasticity of Demand An elastic good will have a higher change in Qd when there is a price change

Calculating Elasticity % change in quantity demanded __________________________ % change in price

Examples of Inelastic Goods Gas/Oil - Need it to power most cars, a very large increase in price would be needed to actually reduce our quantity demanded Salt - Few alternatives and a small amount is purchased and lasts quite a while. We probably wouldn’t even notice a price increase. Goods produced by monopoly - No/few alternatives, if we need it, we don’t have a choice. If we only want it, it will be more elastic. Tap Water - No alternatives Cigarettes - Addiction factor Inelastic Goods Elastic Goods 33

Inverse Relationship of Demand Law of demand states the quantity demanded varies inversely with its price.

Change in Quantity Demanded A Shift in Demand vs. A Change in Quantity Demanded Shift in Demand Change in Quantity Demanded Change total consumer income Price Change change in taste substitute and compliment products Change in expectations Change in total number of consumers 35

Calculating Elasticity If Elasticity is < 1, the good is inelastic If Elasticity is > 1, the good is elastic If Elasticity = 1, the good has a unitary elastic demand

Factors Affecting Elasticity Availability of Substitutes – if you have no other options, demand is inelastic.

Factors Affecting Elasticity Availability of Substitutes – if you have equally appealing options, demand is highly elastic

Factors Affecting Elasticity Relative Importance – what percentage of your budget is spent on the good? If it is low, price changes will not alter demand If it is high, even small price changes can greatly affect demand

Factors Affecting Elasticity Necessities vs. Luxuries – consumption of milk might stay the same with price changes, while consumption of lobster would greatly change with price changes

Factors Affecting Elasticity Change over time – price changes may produce inelastic demand in the short term, but elastic demand long term 1970s fuel crisis – people still bought the same amount of gas at first, but eventually started buying smaller cars

Elasticity and Revenue Total Revenue – the amount of money a company receives by selling its good or service With elastic demand, revenue will decrease greatly with price increases

Elasticity and Revenue With Inelastic demand, price increases will increase revenue