Economics Chapter 4: Demand

Demand Define: the desire, ability and willingness to buy a product Microeconomics: area of economics that deals with behavior and decision making by mall units, such as individuals and firms Explains how prices are determined How individual economic decisions are made

The Individual Demand Schedule/ Curve Schedule: Listing that shows the various quantities demanded of a particular product at all prices. Curve: graph showing the quantity demanded at each and every price that might prevail in the market **Willing to buy more at lower prices. Pg. 90

Law of Demand The quantity demanded of a good or service varies inversely with its price. Price goes up- quantity demanded goes down. Price goes down- quantity demanded goes up.

Market Demand Curve Demand curve that shows the quantities demanded by everyone interested in purchasing the product. Sum of all individual demand curves in the market. (also downward slopping) Page 92

Demand and Marginal Utility Utility- the amount of usefulness or satisfaction that someone gets from the use of a product. Marginal utility- the extra usefulness or satisfaction a person gets from acquiring or using ONE MORE UNIT of a product.

Diminishing Marginal Utility The extra satisfaction we get from using an additional quantity of a product begins to diminish. We are not as willing to pay as much for the 2, 3,4 and so on as we did for the first. This is why our demand curve is downward sloping. When you get to the point where the marginal utility is less than the price, you stop buying.

Change in Quantity Demanded Movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price.

Income Effect Change in quantity demanded because of a change in price that alters consumer’s real income. Gas = $3.50/gal You use= 10gal/week $3.50 x 10 = $35.00 Next week… Gas = 3.25/gal $3.25 x 10 = $32.50 Extra level of income to spend: $2.50

Substitution Effect Change in the relative price of a product causes a change in the quantity demanded. Ex. Lower price will be less expensive than other goods and services make you buy more. Concert tickets are too expensive for your budget, you buy a CD. Movies are too expensive ($10-what?! Really Swamp Fox?), rent from Red Box= $1!

Change in Demand Cause people to buy different amounts of the products at the same price. Entire demand curve shifts: Right= increase in demand Left= decrease in demand

Consumer Income Can change demand… Income goes up= buy more goods and services Income goes down = buy less goods and services

Consumer Tastes Can change demand… Advertising, news reports, fashion trends, introduction of a new product.

Substitutes Can change demand… Change in price of a related product Ex. Rise in the price of butter causes and increase in demand for margarine.

Compliments Can change demand… The use of one increase these use of the other. Example: Hot dogs and Ketchup Computers and Software

Changes in expectations: Can change demand… The way people think about the future. Ex. Weather reports a bad year for crops is ahead. You may stock up on canned goods. Hurricane forecast = high demand for batteries, water, canned foods, generators etc.

Number of Consumers Can change demand: More (or less) people enter the market to buy (or not) causes the demand to shift. Baby boomers…

Elasticity of Demand Elasticity- a measure of responsiveness that tell us how a dependent variable such as quantity responds to a change in the independent variable such as price

Demand Elasticity The extent to which a change in price causes a change in the qauntity demanded. Elasticity tells us how sensitive consumers are to these changes.

Elastic Demand Change in price causes a relatively larger change in quantity demanded. Percentage of change in quantity demanded is relatively larger than the percentage change in price = elastic! Example: fresh vegetables Prices are lower in the summer= high quantity demanded Prices are higher in the winter = lower quantity demanded

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Inelastic Demand A given change in the price causes a relatively smaller change in the quantity demanded. Ex. Salt Can only consume so much small Such a small portion of income is spent on it

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Unit Elastic A given change in prices causes a proportional change in quantity demanded. Percentage change in quantity demanded roughly equals the percentage change in price

Determining Demand Elasticity 1. can the purchased be delayed? 2. Are adequate substitutes available? Does the purchase use a large portion of your income?