Demand Chapter 4

Price changes always affect the quantity demanded because people buy less of a good when its price is up

Demand The desire to own something and the ability to pay for it. Both of these conditions must be present

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 All of us act out this law in our everyday lives, the price of a good will influences what and how much you buy

Would you buy a slice of pizza at lunch if it cost $2? Would you buy the same slice of pizza if it were $4? What about $10? As the price of pizza gets higher, the fewer of us are willing to buy it

Law of demand is the result of two behaviors Together they explain why an increase in price decreases the amount purchased Substitution effect Income effect

Substitution effect Takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good

Income effect Rising prices make us feel poorer The change in consumption that results when a price increase causes real income to decline

Demand Demand means that you want the good and can afford to buy it If you cannot truly afford to buy it, then you do not demand it

Demand schedule Table that lists the quantity of a good that a person will purchase at various prices in a market Individual Demand Schedule Market Demand Schedule Price of a slice of pizza Quantity Demanded $1.00 5 300 $2.00 4 250 $3.00 3 200 $4.00 2 150 $5.00 1 100 $6.00 50

Market demand schedule Show the quantities demanded at various prices by all consumers in the market

Demand curve

Shifts in the demand curve Sometimes increases or decreases in demand are not connected to price There are thousands of other factors that change from day to day

What causes Changes in the demand curve Income Consumer expectations Population Demographics Consumer tastes advertising

Elasticity of Demand Are there some products that you would continue to buy, even if the price were to rise dramatically? Are there some products that you would cut back on or stop buying if the price slightly increased?

Elasticity of demand A measure of how consumers respond to price changes

inelastic Demand is not very sensitive to price changes

Elastic Demand is very sensitive to a change in price

Factors affecting elasticity Availability of substitutes Relative importance Necessities v luxuries Change over time