Demand Chapter 4.

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Presentation transcript:

Demand Chapter 4

Demand The WILLINGNESS and ABILITY of buyers to purchase different quantities of a good at different prices during a specific time period. Market – any place where people come together to buy or sell goods or services

Law of Demand Law of demand states that as the price of a good increases, the quantity demanded of the good decreases and that as the price of a good decreases, the quantity demanded of the good increases.

Law of diminishing marginal utility A law stating that as a person consumes additional units of a good, eventually the utility of the good decreases

Law of Demand in Numbers and Pictures Demand schedule – numerical representation of the law of demand Demand curve – the graphical representation of the law of demand

The Demand Curve Shifts

Factors that cause demand curve to shift: Income – Normal good Inferior good Neutral good Preferences

Factors that cause demand curve to shift: Prices of related goods Substitutes Complements Numbers of buyers Future Price

What causes a change in Quantity Demanded Price There is a difference between demand and quantity demanded

Elasticity of Demand The relationship between the percentage change in quantity demanded and the percentage change in price It measures the relationship between price and the quantity demanded

Elasticity of Demand ELASTIC DEMAND exists when the percentage change in quantity demanded is greater than the percentage change in price INELASTIC DEMAND exists when the percentage change in quantity demanded is less than the percentage change in price UNIT -ELASTIC DEMAND exists when the percentage change in quantity demanded is the same as the percentage change in price

What determines elasticity Number of substitutes Luxuries versus Necessities Percentage of Income Spent on the good Time

Relationship between elasticity and revenue Elastic Demand + Price Increase = Total Revenue Decrease Elastic Demand + Price Decrease = Total Revenue Increase Inelastic Demand + Price Increase = Total Revenue Increase