Chapter 4 Demand

Free Enterprise Economy In the United States producers make and sell goods at the highest possible price. Buyers buy goods at the lowest possible price Forces of demand help set these prices

Definition of Demand Demand – desire to have some good or service and the ability to pay for it. If you cant afford something you have no real demand for it. Even though you may want it.

Law of demand – the price of a good or service goes up people usually buy less of it. So quantity demanded and price have an inverse relationship.

Demand Schedule Shows the law of demand in a chart form.

Demand Curve Shows the laws of demand in a graph form.

Factors That Affect Demand Law of Diminishing Marginal Utility – the marginal benefit of using each additional unit of a product during a given period will decline. Remember when using the term marginal we are referring to one more of something.

Do you think the 50 th hot dog Joey Chestnut ate tasted as good as the first?

Substitute effect – consumers react to a change in the price of a good or service by buying a substitute product.

Income effect - change in the amount of a product a person will buy because of the purchasing power of their income has changed.

6 Factors that change Demand (exam) Income Market Size Consumer Tastes Consumer Expectations Substitute Goods Complementary Goods

Income – change in income will cause buyer to buy less or more Market Size – if the market gets bigger products within that market have a higher demand Consumer Tastes – higher the popularity the more demand of that product Consumer Expectations – if the buyer expects a change in price that will determine when the buyer buys

Substitute Goods – if a good can be used in place of another then that good will be purchased if it is cheaper. Complementary Goods – an increase in demand for one good, will cause an increase in demand for another

Change in Demand vs. Change in Quantity Demanded

Change in quantity demanded is just the change in demand due to the change in price. On a curve it is the movement from one point to another. Change in demand is an actual shift in the demand curve. This would mean the actual market changes affecting demand. On a curve this is the entire line moving either to the left or right.

Elasticity of Demand Elasticity of demand – a measure of how responsive consumers are to changes in price Demand is either elastic or inelastic

Elastic Elastic – if demand is elastic then a change in price either up or down will lead to a large change in quantity demanded. Examples of these types of products would be???

Inelastic Inelastic – change in price leads to a small change in quantity demanded. Examples of these products would be???

How can a product become more elastic?

Determinates of Elasticity 1. Substitute goods – if there are no substitute goods for that product, the demand is inelastic. If the price of your medication goes up what are you going to do? If the price of Arizona Ice Tea goes up what are you going to do?

2. Proportion of Income – if you spend very little on an item and the price of that item goes up, you will still buy that item at relatively the same rate Examples – candy, pencils, q-tips These examples would be inelastic

Examples of elastic products in proportion of income is… Xbox games, another xbox controller, xbox live. If the price of these products go up it is a higher percentage of your income that goes towards buying them, so demand will go down.

3. Necessity vs. Luxuries – milk might be a necessity for some, so an increase in price will result in a small change in quantity demanded, so the demand is inelastic since change in quantity demanded is smaller than change in price Ice cream on the other hand is a luxury so an increase in price will result in a large change in quantity demanded, so the product is elastic.

Total Revenue Total Revenue – the amount of money a company gets from selling its products